The unemployment rate is at a historic level due to shutdowns related to the COVID-19 pandemic and Social Security’s financial health is not immune. Recently The Motley Fool published a story focusing on a couple main reasons why the pandemic is not helpful for Social Security’s future. The first reason is the enduring high unemployment rate, which was over 11 percent for June 2020, compared to 3.5 percent in February prior to the shutdowns across the country that took place in March. Economists expected a bit of an economic bounce back once states and industries began to open, but now there are many parts of the country that are shutting things down again because of increased spread of the virus and some areas facing maximum hospital capacity due coronavirus cases. Below is a piece of the story that states why a higher unemployment rate is not good for Social Security.
Initially, economists were hopeful that as the country opened back up, many of those lost jobs would quickly return. But now with a number of states feeling compelled to impose or reimpose restrictions in a fresh effort to stem the tide of new COVID-19 cases, we may find that many businesses will be forced to close again, leading to even more job losses.
What does this have to do with Social Security? The program gets the bulk of its funding from payroll taxes that workers and employers pay on wages. The more Americans who lose their jobs, the less revenue there will be for the nation’s retirement plan. And that could lead to benefit cuts in the not-so-distant future.
The second major reason, as the article points out, that the pandemic could directly impact Social Security is the threat of low consumer confidence which would likely lead to less spending. This is bad for Social Security beneficiaries because the Cost-Of-Living Adjustment (COLA) many beneficiaries rely on for an annual increase in benefits is partly based on consumer spending. Below is a piece from the story explaining this issue.
Social Security’s annual cost-of-living adjustments (COLAs) are based on third-quarter data from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which measures price fluctuations for a basket of common goods and services. If spending declines in the coming months and the cost of those goods and services generally drops due to low demand, retirees will miss out on a 2021 COLA — a scenario that could prove painful for some who count on those benefits for the bulk of their income.
Though it was clear early on that COVID-19 would pose a substantial health threat to Americans, the intensity of its economic impact has caught many people by surprise. Unfortunately, high unemployment is already wreaking havoc on Social Security by cutting its primary revenue stream, and if the growth in case numbers continues, the program might be in even more trouble. Unfortunately, the same holds true for the seniors who rely on it now, and any of us who plan to rely on it for a significant piece of our retirement income in the future.
