10 Changes to Social Security That Coronavirus Might Cause

The coronavirus pandemic has exposed new cracks in the Social Security system, as well as accelerating concerns that were already there before the virus reared its ugly head. As the country grapples with understanding and adapting to the current reality, those new and worsening fissures with the program make it likely that things will change.

Of course, no structural changes will be set in stone until either Social Security’s trust funds run dry or Congress passes a bill that the president signs into law. Still, there are automatic changes that happen each year that will likely be impacted by the economic havoc that the virus has brought with it. In addition, proposals have already started to be discussed in Congress, and several hundred thousand people have newly signed up to take benefits since the pandemic hit.

With all those factors in play, it's obvious that something is going to change with Social Security thanks to the pandemic. The real questions are what and when. Although the specifics have yet to be determined, here are 10 changes to Social Security that the coronavirus pandemic might cause.

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According to the Social Security Trustees Report for 2020, the program's trust funds were on track to run out of money in 2035. Unfortunately, the report is based on data through the end of the previous calendar year -- you know, before the COVID-19 pandemic hit the United States.

Since those trust funds rely on payroll taxes to be funded, the skyrocketing unemployment from the economic slowdown put in place to attempt to fight the disease has hurt those tax revenues. As a result, there's a very real risk that those trust funds could empty sooner. How soon? Estimates vary, and reality will depend on how quickly the economy recovers, but dates as early as 2029 have been thrown around.

Under current law, Social Security can pay benefits based only on the taxes coming in or from the money in its trust funds. So when the trust funds empty, in the absence of congressional intervention, benefits will get cut to around 79% of currently promised levels.

ALSO READ: 3 Social Security Mistakes That Could Shrink Your Benefits in Retirement

Social Security taxes are levied starting with the first dollar you earn through working, but taxes (and subsequent benefits) are ultimately capped. In 2020, that cap is $137,700. The level of that cap changes each year based on the national average wage index. With unemployment spiking due to the pandemic, there are some odd things happening to this year’s wage index.

First, average wages have actually spiked higher in 2020, as most of the job losses have affected lower-income Americans. Second, because of the timing of the pandemic, many of the people affected had jobs in the beginning of the year but not throughout the rest of the year. Because they were employed during part of the period, they’re counted as having jobs in the wage index math, even if their wages were $0 for a large part of the year.

As a result, there's a very real chance that the Social Security earnings cap will not increase in 2022, when the 2020 wages are used to make the basis of the adjustment.

On the flip side, Social Security benefit levels are indexed to inflation. With so many Americans out of work and many of those with money reluctant to spend due to worries about the virus or the loss of their own jobs, inflation has been pretty tame. Over the past year, the overall inflation levels have been around 1.0%. If this trend continues, it will translate to a very small increase in Social Security benefits.

The increase gets even smaller once you realize that most Social Security beneficiaries are also Medicare recipients and have their Medicare Part B costs deducted from their Social Security checks. Medicare Part B premiums are expected to increase by 2.7% next year, which is a faster rate than Social Security checks will rise.

Thanks to a "hold harmless" provision, Social Security recipients with their Medicare Part B premiums deducted from their benefits won't see their Social Security check decrease in absolute terms. Still, with the premium increase deducting from a small benefit increase, Social Security recipients' net incomes may not move up much at all.

Right now, Social Security's trust funds are 100% invested in special purpose U.S. Treasury debt. The advantage of that situation is that trust funds have a strong likelihood of getting their money back as long as the government retains its ability to tax or print currency. The downside is that even 30-year Treasuries recently yielded less than 1.5%. That means that, despite the fact that Social Security’s trust fund balance is in the neighborhood of $2.9 trillion, it is barely making any returns.

With the trust funds already on track to run dry as benefits outpace collections, and with low interest rates making it tougher for those funds to earn any returns, it may make sense to change strategies. The trade-off is that anything that is not U.S. Treasury debt will be viewed as a riskier investment. As a result, even if it would help the trust funds last longer due to higher returns, that higher risk may make policymakers shy away from trying to get those higher returns.

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If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

President Trump recently signed an executive order designed to defer Social Security payroll taxes between Sept. 1 and the end of the year. If it goes into effect, and your employer stops withholding the tax on your behalf, your take-home check could increase in the short term. Still, it's important to note that the president cannot unilaterally stop those taxes, so in the absence of congressional action, you'd have to pay it eventually, anyway.

It's generally believed that his executive order is a negotiating tactic designed to get Congress to agree to Social Security tax relief as part of the next round of coronavirus response legislation. As a result, if that gambit is successful, you might actually get a real, albeit temporary, reprieve on some of your Social Security tax.

ALSO READ: 5 Common Social Security Questions Answered

Due to the way benefits are calculated, people born in 1960 are currently at risk of seeing their Social Security benefits come in below their current expectations, thanks to the COVID-19 pandemic. In a nutshell, the average wages in the year in which you turn 60 are used as an index to compare versus wages in the previous years in your earnings history.

Because the wage index is expected to come in low for 2020, people born in 1960 will likely see all their historical wages indexed versus a low number, keeping their benefits down. Congress is looking into potential ways to address that issue, but unless it acts, people born in 1960 may see lower-than-expected benefits when it comes time to claim.

Under current law, Social Security's full retirement age is in the process of increasing so that people born in 1960 or later need to wait until they reach age 67 to get their full expected benefits. That change from the traditional age of 65 was part of the 1983 reform to try to extend the life of Social Security's trust funds the last time they were ready to empty.

With the additional stresses currently on the Social Security system, there's talk about potentially raising the full retirement age yet again. If that happens, it will also likely either increase the age at which you can first start claiming or increase the penalty for starting early.

Currently, the first $137,700 you earn through wage-type income is subject to Social Security tax. Raising that income limit would increase the taxes coming into the system today, while the subsequent benefit increases wouldn't be due to paid until later, when those newly taxed people look to collect. There's a proposal to also impose the tax on wages above $400,000.

While that could raise revenue, one of the risks with that proposal is that higher-income people often have some say in how they get paid, and companies have flexibility in their pay practices as well. If all of a sudden the total tax costs of a pay structure increase by more than 12% of that total pay, you can bet clever accountants and highly paid executives will seek out ways to avoid or defer that tax.

Social Security's benefits are reviewed each year and may increase based on whether or not the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) measure of price inflation indicates there was inflation. If a different measure of inflation were used, benefit increases would happen at a different rate. One proposal to change the inflation index is to use "chain weighting," which attempts to reflect the fact that people's purchasing decisions change in response to rising prices.

If the inflation calculation changes to lower the rate of benefit increases, it may help extend the life of the trust funds or reduce the tax increases needed to keep benefits whole over time. The downside, however, is that it also means that retirees depending on Social Security will see even smaller increases in their benefit levels every year than they already currently do.

ALSO READ: 3 Social Security Steps to Take 5 Years Before You Retire

Social Security uses several techniques to means-test benefits so that higher-income people get less return from the program. For instance, there are "bend points" in the benefit formula that mean the first dollars of your salary are worth more to what you receive than the last dollars you earn. In addition, benefits can be subject to tax based on your total income level -- and that income level is not adjusted for inflation. As a result, people with other sources of income often keep less of their benefits.

The way those adjustments are made tends to hide the fact that they're reducing net benefits for higher-income people. More aggressive means-testing proposals include actively reducing the gross benefit received by people if they have incomes above certain levels. While that may help extend the life of the program, it will also risk breaking the personal connection people have with the Social Security benefits they feel they have earned and paid for. That could risk eroding support for the program overall.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

Regardless of what changes the COVID-19 pandemic may bring to Social Security, keep the program's own guidance in mind as you plan for your future. To quote from page 1 of the program's Understanding the Benefits pamphlet: "Social Security was never meant to be the only source of income for people when they retire."

If you build your retirement plan based on that reality, then you’ll be better prepared for whatever changes to Social Security because of the coronavirus pandemic. If benefits get cut, then you'll be glad you have a bigger nest egg. If taxes go up, it's a lot easier to reduce the amount you invest each month than to cut your core costs of living. And if Social Security somehow escapes COVID-19 unscathed, your retirement will simply be that much better because you were more prepared.

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