Absent the COVID-19 pandemic, the near-term outlook for the Social Security trust funds would have changed very little in the past year, the latest annual report from the program’s trustees shows. Social Security can pay full benefits for 10-15 more years, but then faces a significant funding shortfall.
Several key points emerge from the report, which are outlined below.
It is important to understand, however, that the report does not reflect the effects of the COVID-19 pandemic and the resulting recession on the programs’ trust funds, and so doesn’t provide an up-to-date picture of Social Security’s financial status:
- The trustees estimate that, if policymakers take no further action, Social Security’s combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust fund reserves will be depleted in 2035 — the same year predicted in last year’s report.
- While most of Social Security’s benefits are funded by the payroll taxes collected from today’s workers, the program has also accumulated nearly $2.9 trillion in trust fund reserves over the past three decades. During that period, Social Security’s income exceeded its costs, and the program invested the surplus in interest-bearing Treasury securities. Over the next 15 years, those reserves will make up the difference between Social Security’s income and costs.
- After 2035, Social Security could still pay about three-quarters of scheduled benefits using its tax income even if policymakers took no steps to shore up the program. Those who claim that Social Security won’t be around at all when today’s young adults retire and that young workers will receive no benefits either misunderstand or misrepresent the trustees’ projections.
- The program’s shortfall amounts to about 1 percent of gross domestic product (GDP) over the next 75 years (and about 1.4 percent of GDP in the 75th year).
- The program’s trustees have again revised their estimate for the DI trust fund, projecting that its reserves will last through 2065 — an additional 13 years of solvency, compared to the 2019 report. Both DI applications and the total number of disability beneficiaries have been declining; the trustees factored in this past trend and slightly reduced their long-term assumptions about the future share of workers receiving DI.
The COVID-19 pandemic, its economic repercussions, and the legislative response will affect Social Security’s near-term outlook in several ways. Although their magnitude is very uncertain, they will clearly worsen the outlook for the trust funds.
Pandemic, Recession Will Significantly Affect Social Security Finances
The emerging recession triggered by the coronavirus crisis will significantly depress the payroll tax income of the Social Security trust funds for several years. In addition, although less important quantitatively, some laid-off older workers will claim Social Security retirement benefits, and some who are unemployed with severe impairments, including some who have recovered from the coronavirus, will apply for Social Security Disability Insurance. Together, these developments will move up the trust funds’ projected depletion dates. But policymakers will still have time to put Social Security on a stronger financial footing, as they have always done in the past.
For the moment, acting quickly and boldly to contain the virus, lessen its economic damage, and lay the groundwork for an economic recovery are among the most important steps that policymakers can take to protect Social Security for the long run. That’s because the financial strength of Social Security ultimately rests on the productive capacity of the American economy.
When the pandemic is over and the economy has largely recovered, the President and Congress will need to strengthen Social Security’s financing over both the short and long term. Social Security will require a larger share of our nation’s resources in the coming decades as the population ages. Social Security is highly popular, and polls show a widespread willingness to support it through higher tax contributions.
Getting Social Security Solvency Right
Policymakers need to strengthen Social Security. Nearly every American participates in Social Security, first as a worker and eventually as a beneficiary. The program’s benefits are the foundation of income security in old age, though they are modest both in dollar terms and compared with benefits in other countries. Millions of beneficiaries have little or no income other than Social Security.
At that point, if nothing else is done, the program could pay 79 percent of scheduled benefits, mostly out of workers’ ongoing contributions, a figure that would slip to 73 percent within several decades.
Read the full report from the Center on Budget and Policy Priorities here.