Over the past five weeks, our societal habits have been completely shifted due to the spread of the coronavirus disease 2019 (COVID-19). As of a week ago, this was a respiratory illness that had been confirmed in almost 1.7 million people worldwide, nearly 500,000 of whom were Americans. In fact, New York State had more confirmed COVID-19 cases than any other country in the world.
The seriousness of the coronavirus has prompted unprecedented mitigation measures designed to slow the transmission of this disease. While necessary, these measures have shut down most nonessential businesses and threaten the financial livelihoods of many workers and their families.
But it's not just the economy that's under fire from the coronavirus. The most successful social program in history, Social Security, is also beginning to show the adverse effects of COVID-19.
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Social Security's primary revenue generator is under fire from COVID-19
Social Security, which was signed into law almost 85 years ago and has been making consistent payouts to eligible retired workers for the past 80 years, has three sources of income:
- Payroll tax: A 12.4% payroll tax that's applied to earned income (i.e., wages and salary but not investment income) ranging between $0.01 and $137,700, as of 2020. This upper bound increases annually on par with the percentage increase in the National Average Wage Index.
- Taxation of benefits: Single-filing taxpayers with modified adjusted gross income (MAGI) plus one-half of benefits above $25,000 will owe some amount of federal tax on a portion of their Social Security payout. For couples filing jointly, this MAGI-plus-one-half-of-benefits formula begins taxation above $32,000.
- Interest income: The Social Security Administration is required by law to invest its net-cash surpluses into special-issue bonds and certificates of indebtedness. These bonds and certificates of indebtedness pay interest to the Social Security program.
In 2018, Social Security collected just a hair over $1 trillion, with the taxation of benefits and interest income accounting for $35 billion and $83 billion, respectively. By comparison, the payroll tax on wages and salaries led to $885 billion being collected in 2018. The payroll tax is, unquestionably, Social Security's workhorse.
Image source: Getty Images.
The problem is that in order to stem the transmission of COVID-19, most nonessential businesses have been closed, and close to 17 million workers have filed for unemployment benefits in a three-week span. Not only does this mean a considerable drop-off in payroll tax revenue, but unemployment benefits, which have been temporarily boosted by the Coronavirus Aid Relief, and Economic Security Act, are exempt from the payroll tax.
With many states waiting until mid- to late March to order the closure of nonessential businesses, the negative economic effects have, thus far, appeared somewhat mild in April-released data. But if you dig into Social Security's investment holding data (i.e., the special-issue bonds and certificates of indebtedness), the adverse effects of the coronavirus appear plainly visible.
Keeping in mind that some degree of month-to-month fluctuations in Social Security's asset reserves are fairly normal, we witnessed a decline of approximately $6 billion from $2.896 trillion at the end of February 2020 to $2.89 trillion by the end of March 2020. Other factors, such as newly eligible beneficiaries and death rates, can impact Social Security's asset reserves on a monthly basis. But considering the record-breaking disruption we're witnessing in the labor market, it's reasonable to assume that this $6 billion cash outflow from the Social Security program's asset reserves is primarily caused by coronavirus-related economic disruption.
And, as I've previously stated, this outflow is probably going to get a whole lot worse in the months that lie ahead, leading to the program's largest annual net cash outflow in history.
Image source: Getty Images.
The coronavirus isn't a near-term threat to Social Security, but it is a long-term concern
While I'm sure this all sounds a bit scary, especially if you're currently receiving a Social Security benefit or expect to be receiving one within the next couple of months or years, you should know that the coronavirus is absolutely no threat to your monthly payout. Although there are no in-person Social Security visits right now, payouts aren't being interrupted by COVID-19, and there's more than enough in asset reserves (the aforementioned $2.89 trillion) to continue paying monthly benefits.
What I'm trying to say is that no matter what the coronavirus does to the U.S. economy in the short term, COVID-19 can't bankrupt Social Security. Whether you're receiving your benefit now, in 5 years, or in 50 years, a payout will be waiting for you, as long as you have the requisite number of lifetime work credits.
However, this doesn't mean the negative impact of the coronavirus on the U.S. economy is a moot point, either.
Prior to COVID-19 coming into focus, the Social Security Board of Trustees had been warning of a cash shortfall in the program for the past 34 years. In examining Social Security's long-term outlook (the 75 years following the release of a report), the latest Trustees report projected a complete exhaustion of the program's nearly $2.9 trillion in asset reserves by 2035. If this excess cash disappears, the existing payout schedule, inclusive of annual cost-of-living adjustments, would no longer be sustainable. According to the Trustees, an across-the-board benefit cut of up to 23% might await retired workers.
Image source: Getty Images.
If we assume that the negative effects of the coronavirus on the U.S. economy will be exacerbated in April and perhaps May, it's possible that Social Security's asset reserve depletion date may come even sooner than 2035.
Obviously, lawmakers are focused on ensuring the health and well-being of all Americans in the wake of this unprecedented disease. But not long after we emerge from the COVID-19 pandemic, it's going to be more important than ever for lawmakers on Capitol Hill to make an effort to strengthen the Social Security program for current and future generations of retirees.
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April 18, 2020 at 05:49PM
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The Coronavirus' Impact on Social Security Is Now Plainly Visible - The Motley Fool
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