There has been a lot of speculation regarding the health of the Social Security trust funds considering we are in the middle of a pandemic and millions upon millions of Americans are out of work. A new study conducted by the Penn Wharton business school at the University of Pennsylvania indicated that news about the trust funds is not good, but it is also not disastrous.
Prior to the outbreak of the COVID-19 pandemic Social Security actuaries estimated that the trust funds would be depleted by 2035. This would be the year that Social Security reserves would be gone. Considering Social Security would be collecting less in revenue than it pays out in benefits, the agency would only be able to cover about 75 percent of benefit obligations. If nothing is done by Congress beneficiaries can expect a 25 percent reduction in benefits at that time, but most people believe Congress will act to rectify the situation before that.
The new Penn Wharton projection estimates that due to the pandemic, the trust funds would be depleted possibly as early as 2032, but more likely 2034. This is not great news, but it could be much worse. Many people worried the trust funds would be depleted much earlier than this due to the pandemic. Below is a portion of the model completed by Penn Wharton. To view the complete model with all the projections click here.
Reductions to Revenue
The coronavirus pandemic lowers nominal Social Security revenue in three primary ways. First, the loss of jobs, especially concentrated among low-wage workers, reduces payroll tax revenues. The size of this effect increases with the length of the recession. Second, lower interest rates reduce the interest income received by the Trust Fund. Third, a prolonged period of low inflation reduces earnings for all workers and, therefore, reduces tax revenue received by the Trust Fund.
Reductions to Costs
The pandemic also lowers nominal Social Security costs in three ways. First, the coronavirus increases mortality rates (skewed towards those of retirement age), which reduces total benefits paid out of the Trust Fund. Second, lower inflation reduces the Cost of Living Adjustment (COLA) adjustment to benefit payments. Third, initial benefits claimed at retirement fall due to two factors: (a) depressed earnings history of beneficiaries, many of whom lost their jobs; (b) a reduction in the Average Wage Index (AWI) factor that is applied to initial benefits. The smaller AWI reduces benefits even for near retirees who maintain their employment during the pandemic.
Projection: Trust Fund Depletion
The first column in Table 1 presents the depletion date for the Trust Fund under four different scenarios. The first scenario reports the 2020 projection recently released by the Trustees that does not include the effects of the pandemic. For comparison, we include the PWBM pre-pandemic baseline as the second scenario. The final two scenarios show PWBM projections under two different assumptions about the pandemic-induced recession. The third scenario assumes a “V-shaped” recession characterized by a quick recovery. Under this scenario, the depletion date is moved forward two years, from 2036 to 2034, compared to the pre-pandemic baseline. The fourth scenario is a “U-shaped” recession with a more gradual recovery. Under a slower recovery, the depletion date is moved forward by four years, from 2036 to 2032.
