The COVID-19 pandemic has been raging since March, and it's caused major economic upheaval already. Tens of millions of Americans have lost their jobs over the past four months and change, and with cases continuing to soar, the unemployment rate could climb even more.
That's bad news for the economy, but it's especially bad news for Social Security. The reason? The program's main source of funding is payroll taxes. Specifically, wages of up to $137,700 are subject to Social Security taxes this year, with that threshold changing from year to year. Unemployment benefits, on the other hand, aren't subject to a payroll tax. As such, since March, Social Security has been collecting a lot less revenue than it normally takes in, and that trend could continue well into 2021.
Meanwhile, Social Security was already looking at a revenue shortfall before the pandemic even started. Due to the anticipated number of baby boomers who will be leaving the workforce within the next number of years, coupled with an inadequate number of replacement workers, the program will soon start owing more money in benefits than it collects in revenue. Social Security can tap its trust funds to bridge that gap, but once those funds run out of money, they'll be rendered useless. The program's Trustees estimated earlier this year that the Social Security trust funds would be depleted by 2035, but this year's spike in unemployment could cause that to happen sooner.
Still, the COVID-19 pandemic may not wreak quite as much havoc on Social Security as some might think. Here's why.
Delayed Social Security claims could help avert disaster
The reason Social Security anticipates a revenue shortfall in the coming years is that as baby boomers stop working, they'll not only stop being responsible for payroll taxes, but they'll also start signing up to collect their own benefits -- a real double-whammy. But because the COVID-19 crisis has constituted such a major financial setback for so many people, a large percentage of boomers may instead decide to delay retirement and continue working longer -- perhaps to replenish funds lost in their 401(k)s or IRAs, or to compensate for not having made contributions for a period of time. If a substantial enough number of boomers stay in the workforce longer, thus creating more payroll tax revenue in the coming years than initially expected, then Social Security may not, in fact, end up depleting its trust funds sooner than planned.
Now even if a large number of older workers do choose to extend their careers, it won't completely compensate for Social Security's already shaky financial picture. But it may lessen the impact of COVID-19 on the program and at least prevent a scenario where benefits are cut sooner than anyone would like that to happen.
Are benefit cuts a given?
Lawmakers have been working to find a solution to Social Security's anticipated financial shortfall. Different ideas have been tossed around to avoid a scenario where benefits have to be slashed, but so far, they've all had their faults. Still, there is a chance that a reduction in benefits will be averted, so those who rely on Social Security don't necessarily need to panic right away or lose hope.