The Covid-19 pandemic's impact on Social Security will be short-lived, according to a Center for Retirement Research analysis of the federal agency’s 2021 Trustees Report.
Despite the lost payroll withholdings from 2020-2021, the trust fund’s projected depletion date moved just one year, from 2035 to 2034, according to the report.
In addition, some changes to three long-term assumptions—a higher fertility rate, a lower unemployment rate and slowed gains in life expectancy (life expectancy in the U.S. dropped from 78.8 years in 2019 to 77.3 years in 2020, according to the CDC’s National Center for Health Statistics)—improved the 75-year outlook, according to the CRR. Still, the 75-year deficit grew from 3.21% to 3.54% of taxable payrolls.
“Social Security has once again demonstrated its worth during these tumultuous times, when—in the face of economic collapse—it continued to provide steady income to retirees and those with disabilities,” wrote Alicia Munnell, director of the CRR at Boston College, in her analysis of the Trustees Report, released at the end of August. “To maintain confidence in this valuable program and avoid precipitous cuts in 2034, Congress needs to address the program’s 75-year deficit.”
Most importantly, the depletion of the trust fund in 2034 does not mean that Social Security will be bankrupt. Expected payroll tax revenues will continue to support 78% of currently legislated benefits initially, meaning for income to equal expenses, the benefit level to retirees would have to drop to about 27% of pre-retirement earnings from the current 37%, the report said. This represents either a 21% cut for all current and future retirees, or a 25% cut in benefit if the reduction were applied to retirees who become eligible for benefits in 2021 and beyond.
However, Munnell continued, fixing the 75-year deficit would also fix the depletion of the trust fund. In her analysis, she pointed to an immediate increase in payroll taxes by 3.54% (1.8% each for the employer and the employee) as a solution that would allow the agency to pay out the current package of benefits through 2095 for everyone who reaches retirement age, with a one-year reserve fund left over.
The biggest impact on the health of the Social Security system is the fertility prediction, according to the analysis. With just a 0.05 increase in the total fertility rate to an average of two children instead of 1.95, the eventual size of the workforce remains steady instead of declines. Since paycheck withholdings supply income, that is good news. In addition, the effects of the pandemic, including an anticipated 6% bump for Social Security’s annual cost of living adjustment next year, are expected to resolve back to pre-pandemic levels by 2023.
Coming down heavily on the side of retirees, Munnell concluded with a call to action. “The changes required to fix the system are well within the bounds of fluctuations in spending on other programs in the past,” she wrote. “Americans support this program; their representatives should fix its finances."