Retirement Planning > Social Security

4 Factors Affecting Social Security’s Future

Your article was successfully shared with the contacts you provided.
1936 poster in black and white with words Join the march to old age security A 1936 poster issued by the Social Security Board to promote the application for Social Security cards for Americans. (AP Photo)

Although the deficit in the Social Security program is expected to increase even prior to the coronavirus pandemic, a new report from the Center for Retirement Research at Boston College points out that the program’s financing shortfall over the next 75 years is “manageable” and, once the pandemic has been dealt with, can—and should—be addressed to allow it to continue to pay full promised benefits to retirees.

Fewer Babies, Reduced Payroll Taxes, Low Inflation and Interest Rates

Four factors weigh on the 75-year deficit, which has increased from 2.78 percent to 3.21 percent of taxable payroll. Those factors are the following:

  • repeal of the tax on high premium health plans, resulting in lower earnings and payroll taxes
  • a lower assumed total fertility rate
  • lower inflation, which reduces earnings and payroll taxes before it hits benefits
  • and a lower interest rate, which means less discounting of large future deficits.

Between a lower fertility rate, which cuts the number of future participants in the program, and a wave of retiring boomers, the ratio of workers to retirees has fallen from about 3:1 to 2:1; that has raised costs accordingly. When the effect of longer lifespans is added in—meaning that retirees collect benefits for a longer period of time—there is a problem along the road ahead.

In addition, the Great Recession took a toll on the Social Security trust fund, which had been expected not to be needed to help pay benefits until several years later than happened in actuality. Currently what’s being drawn on is the interest on the trust fund; but since payroll taxes are presently inadequate to cover all the legislated benefits they are intended to cover, that means the program will have to start drawing on the principal in the trust fund.

However, says the report, not only does the trust fund depletion date remain at 2035, payroll taxes will still be able to cover approximately 79 percent of promised benefits. And the coronavirus is unlikely “to fundamentally alter the long-term financial status of the program.”

What the pandemic has done, though, is to highlight how important the Social Security program is to millions of Americans and their financial well-being, as well as to pose potential problems that could be solved by policymakers as previous problems have been.

The report adds that there will be some effects of Covid-19 on some groups of retirees: “To the extent that COVID-19 results in a decline in average earnings in 2020, those born in 1960 (who turn 60 in 2020) could see a permanent cut in their benefits. The problem arises because past earnings and the benefit formula are adjusted by Social Security’s Average Wage Index.” The resulting calculations could result in a “notch” group.

No Public Trustees Since 2015

In addition, the report points out that there has been no replacement of public trustees, who have been missing since 2015. Says the report, “These slots should be filled. Public trustees play an important role in overseeing the program and communicating its status to the public. Their continued absence reflects a failure with the political process, not with the program itself.”

The report concludes, “[O]nce this crisis subsides, stabilizing Social Security’s finances should be a high priority to restore confidence in our ability to manage our fiscal policy and to assure working Americans that they will receive the income they need in retirement. The long-run deficit can be eliminated only by putting more money into the system or by cutting benefits. There is no silver bullet.”

— Related on ThinkAdvisor: