5 Ways the Coronavirus Will Hurt Social Security

5 Ways the Coronavirus Will Hurt Social Security

  • 0

Over the past two-plus months, we've witnessed the coronavirus disease 2019 (COVID-19) completely reshape our society. Mitigation measures that seemed far-fetched at the beginning of March to stem the transmission of COVID-19, such as the mandated closure of nonessential businesses, have become a reality in a majority of states. This unprecedented economic disruption has cost more than 30 million people their jobs.

But it's not just working Americans that could feel the pinch of the coronavirus pandemic. America's most successful social program, Social Security, will be directly affected in the short and long run by the impact of COVID-19. Here are five ways the coronavirus is expected to negatively impact Social Security moving forward.

Image source: Getty Images.

1. A considerable hit to payroll tax collection

The biggest problem for Social Security is labor market disruption. Of the program's three sources of income, the 12.4% payroll tax on earned income (wages and salary, but not investment income) accounted for $944.5 billion of the $1.06 trillion in revenue collected in 2019. But in order to collect this revenue, Americans have to be working.

Over the past roughly six weeks, more than 30 million people have lost their jobs, and unemployment benefits are exempt from the payroll tax. This is to say that 30 million people who had been contributing payroll tax revenue to Social Security suddenly aren't.

If there is good news here, it's that solvency isn't an immediate issue for Social Security given that it began the year with $2.9 trillion in asset reserves. But there's no doubt that the program will see its largest net cash outflow in history in 2020 as a result of this record-breaking disruption.

Image source: Getty Images.

2. Lower net interest income

Social Security's second-largest source of income (interest income) is also at risk because of the coronavirus. Interest income accounted for almost $81 billion in revenue in 2019.

First off, the Federal Reserve lowered its federal funds target rate back to an all-time record low of 0% to 0.25% when the scope of the coronavirus disruption became clear. Social Security's asset reserves -- i.e., its net cash surplus built up since inception – are required by law to be invested into special-issue bonds and certificates of indebtedness that yield interest. The yields on these bonds are dictated by the prevailing market. With the Fed pushing its federal funds rate back to a record low, the yields on new special-issue bonds will be historically low and negatively impact the interest-earning power of Social Security's nearly $2.9 trillion in asset reserves.

Additionally, less payroll tax revenue will lead to a huge outflow in cash in 2020. With less in the way of asset reserves, Social Security will have a smaller base with which to earn interest income.

Image source: Getty Images.

3. Less taxation of benefits revenue

Even Social Security's smallest revenue contributor will be adversely effected.

In 2019, the taxation of Social Security benefits added $36.5 billion in revenue, or about 3.4% of what was collected. This tax was introduced in 1984 and is applicable to any beneficiary whose modified adjusted gross income plus one-half of benefits exceeds $25,000 (or $32,000 for a couple filing jointly). Generally speaking, close to half of all retired workers receiving Social Security will owe tax on either 50% or 85% of their benefits, depending on their income.

The issue is that the coronavirus has potentially knocked some seniors who had been working and receiving a benefit out of the labor force. With some seniors liable to have less in the way of earned income in 2020, the expectation is that fewer beneficiaries will face taxation on their benefits this year.

Image source: Getty Images.

4. Weaker net immigration

Immigration is another very clear problem facing Social Security due to COVID-19.

Among the many initiatives President Trump has implemented to slow the transmission of the coronavirus is an executive order, announced last month, to temporarily suspend immigration into the United States. According to an administration official, the design of the order is to put a halt on some work visas for perhaps up to 120 days.

However, net immigration into the U.S. is essential to Social Security's financial well-being. Most migrants to the U.S. tend to be young, and will therefore spend decades in the labor force before collecting an eventual retirement benefit of their own. Significantly slowing down the arrival of migrants into the U.S. -- which is a trend that's persisted for about two decades -- only threatens to further weaken the worker-to-beneficiary ratio and may make it costlier to fix Social Security over the long term.

Image source: Getty Images.

5. Consistently low birth rates

Fifth and finally, the coronavirus may continue to weigh on persistently low birth rates, which recently hit an all-time low.

While the idea of being quarantined at home might raise the possibility of a second baby boom similar to what was experienced in the U.S. following World War II, we're liable to see the exact opposite. Millennials have been scarred by economic disruption before (e.g., the Great Recession), and their response has been to delay marriage and hold off on having children until they're more financially set. Chances are that the coronavirus pandemic hasn't helped many millennial families improve their financial situations.

If birth rates remain historically low, future generations will have difficulty keeping pace with the number of existing workers who choose to retire and take benefits. In other words, it could lead to a long-term decline in the worker-to-beneficiary ratio and make it costlier for working Americans to fix Social Security.

Even if COVID-19 is put into the rearview mirror relatively quickly, it's going to have a lasting impact on Social Security.

The $16,728 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

The business news you need

* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.

Related to this story

Most Popular

Get up-to-the-minute news sent straight to your device.


News Alerts

Breaking News