Back in November of 2019, we thought Social Security would dry up in 2035. After covid, is that still true?
Pre-covid, it was estimated that we had a little over a decade before Social Security funds began to dry up. According to the Social Security Administration (SSA)’s 2019 OASDI (Old Age, Survivors and Disability Insurance) Trustees Report (or, more officially, The 2019 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds), “Under the intermediate assumptions, the projected hypothetical combined OASI and DI Trust Fund asset reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2035.”[1] This means that, while funds haven’t hit zero, benefits will be cut to about 80% of benefits (77% of OASI and 91% of DI) to ensure an extended longevity of the programs. However, they do note that 2035 is an average timeline and that, “considered separately, the OASI Trust Fund reserves become depleted in 2034 and the DI Trust Fund reserves become depleted in 2052.”
This paints a dark picture, but the timeline determined above gives us over a decade to solve the problem before we feel its effects, enough time to, if not completely eliminate, at least forestall the seemingly inevitable. The coronavirus pandemic, however, has made things considerably worse. Social Security is primarily funded through payroll taxes; however, due to the significant layoffs caused by COVID-19, 10.7 million fewer workers are paying into social security, plus many others have had their hours cut. Taken together, this means that Social Security contributions have slowed down significantly. Not only that, but the Bipartisan Policy Center has made four projections ranging from “most severe recession” (1.5x the Great Recession) to “least severe recession” (2/3rds of CBO’s pandemic effects).[2]
The most pessimistic forecast estimates the reserve depletion date of Old-Age, Survivors, and Disability Insurance (OASDI) to be 2028, with Old-Age and Survivors Insurance (OASI) depleting in 2029, and Disability Insurance (DI) in 2023, while their most optimistic estimation which has the OASDI depleting in 2034, OASI in 2033, and DI in 2054.[3] While there is a significant difference between each of the four options they put forth, one thing is clear; regardless of how quickly it’s done or what the exact numerical value is, the covid recession will inevitably accelerate the depletion of funds. In most of their simulations, they estimate that OASI benefits would result in a ~25% cut of retirement benefits and ~10% cut of disability benefits when trust funds are depleted.
President-elect Joe Biden has proposed expanding payroll tax from applying to the first $137,00 of earnings to also applying to any amount made over $400,000. [4] As the $137,000 threshold rises over time, all income up to $400,000 would be taxed in almost 30 years as estimated by the Urban Institute.
A 2017 study conducted by the Social Security Administration found that 51.8% of adults over 65 relied on social security as 50% or more of their income, and for 24.7% Social Security benefits accounted for 90% or more of their income. [5] As Social Security becomes less and less, well, secure, individuals will need to more heavily rely on other options. Social Security is part of the “three-legged stool” or “three pillars” of retirement income, along with employer pensions and retirement accounts, and personal savings and assets.
On the bright side, advisors are in an excellent position to help their clients navigate such uncertainty. While advisors clearly do not control the rate at which Social Security funds are depleted, they certainly can help their clients understand the serious impacts that the coronavirus has had upon Social Security and encourage them to invest where they otherwise might not, to ensure that they have personal savings built up to adequately fund their retirement needs. Some may not be investing as heavily with the assumption that they can draw upon Social Security, but as uncertainty looms in the very near future, ensuring that clients are aware and able to adequately prepare in advance (all with the help of a knowledgeable financial professional, of course!) helps to set them up for success instead of a rude awakening when it’s too late.
[1] https://www.ssa.gov/OACT/TR/2019/tr2019.pdf
[2] https://bipartisanpolicy.org/explainer/covid19-social-security/
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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