This is a fantastic overview of Social Security’s current funding outlook during the COVID-19 era by Steve Parrish over at Forbes.
Parrish’s two-part series examines both pre-COVID Social Security projections and breaks down all the factors that make COVID Social Security’s biggest threat.
When issues about the long-term health of Social Security are raised, the common refrain from many is that the government won’t let this happen... But what could these solutions look like?
Where Social Security gets its funding
We—and most other Social Security advocates—repeat the refrain that Social Security has one dedicated source of funding in the form of payroll contributions.
But if we’re looking for accuracy, there are actually four sources of Social Security income:
- Employee payroll tax contributions (6.2%)
- Employer payroll tax contributions (6.2%)
- The interest earned on money that has been borrowed and spent from the Trust Fund surplus
- Taxes paid on Social Security benefits by Social Security beneficiaries (3%)
These collectively represent Social Security’s total assets. Nothing else ends up in the Trust except what we, the public, contribute and the resulting interest on those contributions. By law, Social Security is not allowed to borrow any other kind of funding to pay benefits.
Knowing how Social Security gets its money is the key to understanding how devastating our economic disruption could be on Social Security’s future.
How COVID is projected to impact Social Security
Unemployment. This is the big one. The core source of funding for Social Security is a thriving workforce. Between employers and employees, 85% of the money used to pay out benefits comes out of the public’s paychecks. Right now, 14.7% of those who could work are out of a job. If Americans aren’t working, they aren’t contributing to Social Security. And today’s beneficiaries’ benefits are paid directly from those contributing payroll taxes right now. This is a massive amount of money that has disappeared in a matter of months.
Business closures and lay-offs. Employers share half of the payroll tax responsibility with their employees. But, if they’ve laid off a significant amount of their employees or closed up shop completely, these employers aren’t contributing payroll taxes either.
Lower interest rates. Interest rates are through the floor right now. That includes the interest rates on that surplus money that was borrowed from the Trust. We are not seeing the interest return revenue on those T-bills that we had just months ago. That’s another big loss for Social Security’s coffers.
Increased demand. The article doesn’t mention this, but it’s worth noting because we’ve seen it before in previous economic downturns. When people lose their jobs unexpectedly or have reason to think their other retirement plans and sources of income won’t pan out, we typically see an increase in people filing for early retirement or applying for Social Security earlier than they’d planned. Instability is a big motivator for people to seek out their benefits—it’s guaranteed income during uncertain times. This means we can reasonably expect demand on Social Security to increase at the same time contributions are dwindling, adding pressure to an already precarious situation.