As the number of confirmed Coronavirus cases nears 2.4 million in the United States, the virus has extracted a heavy toll in terms of deaths, hospitalizations, job loss and economic malaise. As devastating as Covid-19 has been the past four months in terms of loss of human life and economic conditions, it may be minor in comparison to the potential long-term impact it has on Social Security.
In April of this year the trustees for Social Security released their annual report on the financial condition of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Among the interesting findings in the report was the trustees’ projection that the cost of Social Security benefits will outpace payroll tax revenue in 2021. The trustees’ report also projected that the $3 Trillion trust fund would be depleted in 2034 if current trends continue, necessitating a cut in payment of Social Security benefits.
In order to keep the system solvent for another seventy-five years, the trustees recommend increasing Social Security payroll taxes anywhere from 3.14% to 10.54%, permanently reducing Social Security benefits to current and future recipients by 19%, or some combination of the two. Surely neither solution will be very popular with a sizable percentage of the U.S. population.
Another party weighs in
More recently, the Bipartisan Policy Center released another study that explored the impact of Covid-19 on the future of Social Security. In their report they ran through analyses of several scenarios projecting how the economic uncertainty arising from the Covid-19 pandemic could impact the future of the Social Security system.
One scenario focused on the occurrence of another “Great Recession” similar to the economic contraction that started in late 2007 and lasted until early 2009. The trustees report from early 2008, before the full weight of the economic recession was felt, projected a healthy Social Security trust fund until 2041. This meant income (tax revenues) would outpace program costs until 2041. After the recession had ended, the 2012 trustees report revised their projections for the health of the Social Security trust fund indicating that the fund would now spend more than it brought in by 2033, eight years earlier than earlier projections.
Projections for the health of the Social Security system have changed occasionally from that point, but they have generally ranged from 2033 on the low end, to 2035 on the high end. The Bipartisan Policy Center’s recent analysis projects a program shortfall by 2029, if the economic impact of the Coronavirus were similar to the “Great Recession” of 2008. Furthermore, if policy changes are not implemented, the analysis concludes that revenues would necessitate 31% cuts in retirement benefit payments and 16% cuts in disability benefit payments.
What does this mean for your financial plan?
While the dismal outlook for Social Security is not exactly news to most people, this recent analysis of just how dire the future could be might be very alarming for many people. How could a shortfall in the Social Security program’s funding in nine short years impact your financial planning strategies? The answers to that question may very well depend on whether you are in retirement, preparing for retirement or are solidly in the wealth-accumulation stage of your career.
The easiest cohort to plan for should prove to be wealth-accumulating workers. There is little doubt that payroll taxes will need to increase in order to fund the projected shortfall, so today’s workers should plan to pay higher taxes during their working years. Combine the problems with Social Security and the profligate spending by the Federal Government, and younger workers can expect significantly higher payroll taxes and higher tax brackets in the not-too-distant future. Workers will want to take advantage of pre-tax IRA and 401(k) contribution opportunities where possible to lessen the tax bit in future years. It is not out of the question that younger workers may have their Social Security benefit claiming dates pushed back further as well.
Retirees may well be the hardest group to plan for, as they will have the least amount of flexibility to adjust their financial plans in the wake of abrupt Social Security changes. While benefit payment cuts would be the least palatable solution to improve Social Security’s condition, it is not completely out of the question either. Higher taxes on Social Security benefit payments is a distinct possibility, as higher taxes will raise more revenue while avoiding the appearance of a direct cut to retirees’ Social Security benefits.
Soon-to-be retirees may also face challenges with their financial planning activities too. While it is unlikely that their benefit claim dates will be delayed, it is a very real possibility that their payroll taxes will significantly increase in the short-term, and income taxes on Social Security benefits may increase significantly in the long-term too.
The looming Social Security crisis will require some pain and sacrifice by most stakeholders in order to ensure that Social Security benefit promises are kept to current and future recipients. Planning for possible and/or probable changes to the program early on may reduce any potential impacts to your comfortable retirement. Call the financial planners at Bollin Wealth Management at 419-878-3934 to schedule a virtual or in-person appointment to discuss the impact of potential Social Security changes on your retirement plans.
Sources: SSA.gov, bipartisanpolicy.org, Wall Street Journal