The Social Security trust funds, created to help pay future retirement benefits when payroll tax revenue alone is no longer sufficient, will run dry in 2034, one year sooner than previously predicted, as a result of the economic fallout from the Covid-19 pandemic.
The Social Security Board of Trustees on Tuesday released its annual report on the long-term financial status of the Social Security trust funds, projecting that the combined asset reserves of the retirement, survivor and disability programs would be depleted within 13 years, one year sooner than had been forecast in last year’s report. At that point, Social Security would be able to pay only 78% of projected benefits, down from the 79% projection in the 2020 report.
The Old Age and Survivor Insurance trust fund and the Disability Insurance trust fund are separate entities under law. But the report presents information that combines the reserves of these two trust funds to illustrate the actuarial status of the Social Security program as a whole.
The 2021 trustees report is the first snapshot of the impact of the Covid-19 pandemic on Social Security’s financial status. Last year’s report, issued in April 2020, didn’t reflect the job losses and resulting reduction in payroll tax collections caused by the pandemic. In addition, involuntary retirements of older workers may have prompted them to claim Social Security benefits earlier than they had planned.
“The Trustees’ projections in this year’s report include the best estimates of the effects of the COVID-19 pandemic on the Social Security program,” Kilolo Kijakazi, acting commissioner of Social Security, said in a statement. “The pandemic and its economic impact have had an effect on Social Security’s Trust Funds, and the future course of the pandemic is still uncertain. Yet, Social Security will continue to play a critical role in the lives of 65 million beneficiaries and 176 million workers and their families during 2021.”
“The Covid-19 pandemic and 2020 recession have had significant effects on the short-range finances of both” the Social Security and Medicare programs, the trustees report said.
“Employment, earnings, interest rates and GPD dropped substantially in the second quarter of 2020 and are assumed to rise gradually toward full recovery in 2023, with the level of worker productivity and thus GDP permanently lowered by 1%,” according to the report. “In addition, the pandemic and recession are assumed to lead to elevated mortality rates during the 2020-2023 period and delays in births and immigration in the near term.”
In 2021, the total annual cost of the program is projected to exceed total annual income for the first time since 1982 and it’s expected to remain higher throughout the 75-year projection period. As a result, asset reserves are expected to decline during 2021. Social Security’s cost has exceeded its noninterest income since 2010.
The report cautioned that “there is, however, an unusually large degree of uncertainty associated with the eventual effects of the Covid-19 and future projections could change significantly as more information becomes available.”
Treasury Secretary Janet Yellen, leading the members of the Social Security and Medicare Trustees, said: “Having strong Social Security and Medicare programs is essential in order to ensure a secure retirement for all Americans, especially for our most vulnerable population.”
Labor Secretary Marty Walsh, another member of the trustees board, added: “The Biden-Harris administration’s commitment to building back better isn’t only about roads or bridges, it is also about rebuilding our promise of a secure retirement for America’s workers, retirees and their families.”
The trustees announced that the combined assets of the Old Age and Survivor Trust Fund and Disability Trust Fund increased by $11 billion in 2019, to a total of $2.9 trillion in 2020.
The OASI Trust Fund is projected to become depleted in 2033, one year sooner than last year’s estimate, with 76% of benefits payable at that time. The DI trust fund is estimated to become depleted in 2057, eight years earlier than last year’s estimate of 2065, with 91% of benefits still payable.
As a result of that trust funds crisis, Congress approved comprehensive Social Security reform in 1983.
The new trustees report projects that the combined trust fund reserves are projected to decrease in 2021 because total cost ($1.141 trillion) is expected to exceed total income ($1.074 trillion). The trustees project that OASDI total cost will exceed total income each year through the remainder of the 75-year projection period unless Congress steps in.
In 2020, Social Security paid retirement, survivor and disability benefits totaling $1.1 trillion to more than 64 million beneficiaries.
During 2020, an estimated 174.8 million people had earned income covered by Social Security and paid payroll taxes, down from 178 million in 2019. During the early months of the recession, more than 22 million Americans have filed for unemployment benefits — resulting in a sizable drop in payroll tax collections.
(Questions about Social Security rules? Find the answers in Mary Beth Franklin’s 2021 ebook at MaximizingSocialSecurityBenefits.com.)