Will Social Security be yet another casualty of COVID-19?
I devoted a column to this subject in mid-April, you may recall. I argued that, while it was way too early to know what the pandemic’s impact would be on Social Security’s long-term solvency, that impact should not be exaggerated. I concluded that there were many other more urgent things to worry about.
Here we are today, nearly three months later, and there’s just as much uncertainty as there was then (if not more). But what we have today that we didn’t in April are three major actuarial studies of possible impacts. One was from Stephen Goss, the chief actuary for the Social Security Administration; the others were from the Penn Wharton Budget Model and the Bipartisan Policy Center.
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These three actuarial assessments were compared and contrasted in a recent blog post from the Peter G. Peterson Foundation, a nonprofit organization founded a dozen years ago to address challenges to the U.S.’s fiscal and economic sustainability. The data in the table below is from the Foundation’s post; each cell of the table reflects the year in which the Old Age and Survivor Insurance (OASI) trust fund would, according to the actuarial model and various assumptions, be depleted. (The OASI trust fund, of course, is the one that pays Social Security benefits.)
|Pre-pandemic||Post-Pandemic Estimate assuming quick economic recovery||Post-Pandemic Estimate assuming extended recession|
|Penn Wharton Budget Model||2036||2034||2032|
|Bipartisan Policy Center||2035||2029||2026|
|Stephen Goss, Social Security Actuary||2035||2034||2033|
Why the disconcertingly wide range of possible depletion dates, from as early as 2026 to as late as 2034? Though there are numerous inputs to each of the actuarial models, and thus many sources of differences, the main one, according to an email from the Peterson Foundation, is differing assumptions on “revenue losses due to the extent and duration of the economic downturn” caused by the COVID-19.
For example, Goss said in a recent panel discussion, his projected depletion date falls from 2035 to 2034 on the assumption that payroll taxes paid into the Social Security will be 15% lower in 2020 than originally projected—but return to normal in 2021. He added that the projected depletion date becomes one more year earlier—2033—if we assume that payroll taxes paid into the OASI in 2021 will also be 15% lower than previously assumed, but then return to normal.
Relative to some of the more dire economic forecasts from some doom-and-gloomers, even the more pessimistic of Goss’s scenarios looks relatively sanguine. The Bipartisan Policy Center (BPC), for example, points out that the Great Financial Crisis caused the OASI’s projected depletion date to be accelerated by eight years. Given that some are projecting an economic downturn rivaling the Great Depression of the 1930s, a mere two-year acceleration in depletion date looks to be the functional equivalent of dodging a bullet.
Putting these depletion dates in perspective
The even-earlier depletion dates from the Bipartisan Policy Center are indeed disturbing. Nevertheless, we shouldn’t exaggerate what they mean for our retirements.
After all, we already knew that the OASI most would be depleted at some point in the next 15 years. COVID-19 has not changed that fact, but instead just accelerated when that date will arrive—either by a couple of years or as many as nine. Note carefully, however, that unless your remaining life expectancy is less than 15 years, you were going to have to deal with this eventuality anyway.
To be sure, it will be up to Congress to pass legislation to augment Social Security’s revenues and/or reduce future benefits. And, given the gridlock on Capitol Hill these days, that certainly seems highly unlikely.
But I am an optimist. We need to remember what happened the last time the OASI trust fund was projected to be depleted, in 1983. Congress had known for years prior that it needed to do something to shore up the OASI’s finances, as Social Security’s actuaries for some time had been projecting that depletion date. But, I’m sure you’ll be shocked to learn, Congress kept putting off implementing any fixes. It didn’t pass the necessary fixes until just four months prior to the depletion date.
My guess is that it will once again come down to the wire before Congress acts.
What if I’m wrong and Congress implements no fixes? It’s important to note that Social Security payments don’t drop to zero at the depletion date. The locution “running out of money,” which many commentators sloppily use when describing what will happen, conjures up a scenario in which Social Security checks simply stop being sent.
That’s not what will happen. Instead, payments will be reduced. Even in the most dire of the scenarios presented in the table above, the BPC projects that Social Security recipients would be paid 69 cents on the dollar of what they were otherwise entitled to receive. Before the pandemic, the Social Security Administration was projecting that recipients would receive 79 cents on the dollar when the OASI trust fund eventually becomes depleted.
It’s important to get this right. Assuming Congress makes no changes, at some point between six and 14 years from now, Social Security payments will have to be cut to somewhere between 69 and 79 cents on the dollar.
That’s bad, but not the end of the world. That’s why I said three months ago, and I repeat here, that there are far more urgent matters for us to worry about right now than when the OASI trust fund gets depleted.