Although concerns about the sustainability of benefits from the Social Security Administration aren’t new, the advent of the COVID-19 pandemic has raised new questions about the income that people will receive during their retirement years. To provide context about what may happen next, Forbes.com provides an overview of how these benefits are funded.
Payroll taxes provide 76% of funding for Social Security Administration benefits. So, when an economic downturn occurs — such as what’s happened since COVID hit — fewer dollars go into the pot for retirement benefits because unemployed people don’t contribute.
A Closer Look at Funding
In 2020, employers and employees are each paying 7.65% of wages (up to $137,700) into the fund. Of that:
- 10.6% goes to retirement benefits, put into the Old-Age and Survivors Insurance (OASI) Trust Fund
- 1.8% goes to the Disability Insurance Trust Fund
- 2.9% goes to hospital insurance that pays for Medicare, Part A
It is anticipated that in 2020, Social Security retirement benefits paid out will exceed dollars paid in through payroll taxes, meaning that funds in the trust would begin to be used. If no adjustments are made to how Social Security is funded, the trust will be empty by 2034 — which means that dollars taken in would be all that was available to pay out retirement benefits.
Now Add in the COVID-19 Pandemic
The Motely Fool notes that the current Social Security situation means the government will need to come up with solutions so that people can continue to receive retirement benefits into the future. It’s possible, of course, that they’ll cut benefit amounts, or they might decide to raise Social Security taxes or increase the full retirement age for future generations. The reality is that we just don’t know what actions the government will ultimately take.
Here’s another angle to consider. If you were still working pre-COVID and lost your job, this means you’ve paid less in payroll taxes in 2020 than you’d anticipated — which may affect what you’ll receive in monthly benefits. Social Security benefits are calculated by averaging your top 35 earning years, considering the income on which you paid Social Security taxes. This figure is adjusted for inflation.
So, what will a COVID job loss mean for you? One year of layoff probably won’t hurt your benefits, so it depends upon how long you won’t be working — and if you’d already cut down to part-time hours, it likely wouldn’t have an impact at all because 2020 probably wouldn’t have been one of your top earning years.
Here’s one more scenario. If someone is nearing retirement, COVID fears or job loss could cause that person to decide to start receiving Social Security benefits earlier. If so, the monthly amount would be less.
If Economic Conditions Continue
The degree of the economic impact of COVID on Social Security retirement benefits will depend, of course, on how long economic conditions caused by the pandemic will last. The director of the Center for Retirement Research at Boston College told NextAvenue.org that if payroll taxes drop by 20% — and do so for two years — this would cause depletion dates of the trust fund to shrink by two years. She notes that once the economy and employment figures stabilize, addressing Social Security should be a high priority. The Bipartisan Policy Center believes that the economic impact of the pandemic and associated job loss could cause the depletion dates to move up to as early as 2029.
These are educated predictions, but not hard and fast realities. What happens with Social Security will depend, in large part, upon the government response to the challenge. As Chris Farrell, the senior economics contributor for American Public Media's Marketplace writes: “Once the pandemic is finally in the rear-view mirror, Washington should turn toward improving the finances of the Social Security retirement system and the Medicare health insurance system.”