Besides the impact on human health over the last year, the COVID-19 virus has affected the Social Security program’s financial reserves. Last year’s sharp decline in employment meant a corresponding reduction in the dedicated payroll taxes that feed into the Social Security Trust Fund, the fund from which Social Security payments are drawn.
While there are no near-term ramifications for current or soon-to-be Social Security beneficiaries, the revenue shortfall likely lessens the time remaining for elected officials to adjust the program to prevent future benefit cuts.
The deadline for reform moves closer
Prior to the pandemic, Social Security and Medicare Trust Fund Administrators noted the following in their annual report: “The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034.” After that time, “the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits.”1
More directly, as currently structured, the program should be able to pay full benefits until 2034, after which time benefits would automatically decline to 76% of their prior level.
Since its inception in 1940, the Social Security Trust Fund has taken in $23.0 trillion in program-dedicated payroll taxes and other revenue, according to the Congressional Research Service. Through the end of 2019, the program had paid benefits of $20.1 trillion, leaving a reserve of $2.9 trillion.
However, since 2010, payroll tax revenues have been replenishing the Trust Fund more slowly than benefits have been paid out, meaning the Trust Fund reserve is being depleted. The next Trustees report (expected later this spring) is likely to show the 2020 decline in payroll taxes as further shortening the time frame to address the shortfall — possibly to 2032 from 2034 previously.
At the core of the solvency problem is a declining number of active workers supporting a growing number of retirees.
- In 1960, there were 5.1 workers per beneficiary, according to the Social Security Administration (SSA).
- By 2000, the ratio had dropped to 3.4.
- In 2019, it was down to 2.5.
- The SSA projects the rate will fall to 2.1 by 2030.
Regardless of the exact year, elected officials will have to act. Potential changes to eligibility could address the shortfall, as revenue would continue to help fund the program. Changes to the program would likely be gradual and phased in over time.
We’ve been here before
In the early 1980s, Social Security faced a similar challenge. As Trust Fund reserves dwindled, a bipartisan commission was formed, resulting in the Social Security Trust Fund Amendments of 1983.
The legislation offered a multifaceted solution that both increased program revenues and reduced long-term costs. Most notably, the payroll tax rate was slowly lifted by a total of 1.6% (split between employees and employers), and the full retirement age phased up over time to age 67 from 65. Individuals retiring in 2022 will be the first to do so at a full retirement age of 67.
The path ahead
For some time, leaders on both sides of the political aisle have been working on the solvency issue. However, Congressional leaders have indicated they are unlikely to address Social Security reform in earnest until the COVID-19 health emergency is brought under control and the economy is on stronger ground.
On the tax front, the Biden Administration has proposed expansion of the income subject to Social Security payroll taxes. In 2020, taxes were applied against the first $137,700 of income, a level that increases yearly (the limit is $142,800 for 2021).
The President has proposed payroll taxes resume on income above $400,000. Some estimates suggest the change could account for about a third of the required program revenue adjustments, if implemented.
Social Security is widely viewed as one of the most successful government programs in American history.
- The Congressional Research Service estimates that 93% of American workers participated in the program last year.
- In a 2017 study using IRS tax data, Census Bureau economists estimated approximately 42% of Americans over age 65 relied on Social Security payments for 50% or more of their income.
As with prior Social Security program changes, we do not anticipate future reforms to materially affect current or near-term Social Security beneficiaries. However, given the importance, retirement income should not be left to the chance of pending reforms. If you are concerned about the variability or uncertainty of Social Security retirement benefits, talk to your Ameriprise financial advisor. They will help you build flexibility into your personalized retirement income plan.