The Social Security Board of Trustees on Wednesday released its annual report on the long-term financial status of the Social Security Trust Funds, and did not change projections from last year as to when it predicts the trust funds will be depleted.
The report finds the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds are projected to become depleted in 2035, the same as projected last year, with 79% of benefits payable at that time. The new report is also quick to note it does NOT factor in the effect of the COVID-19 economic crisis, and the resulting massive job losses that are significantly diminishing the amount of money going into the trust fund.
The Labor Department announced Thursday another 4.4 million Americans filed for unemployment benefits last week, bringing the 5-week total to 26.4 million. With the U.S. labor force at roughly 165 million, that means one-sixth of it is now unemployed.
“The projections in this year’s report do not reflect the potential effects of the COVID-19 pandemic on the Social Security program. Given the uncertainty associated with these impacts, the Trustees believe it is not possible to adjust estimates accurately at this time,” said Andrew Saul, Commissioner of Social Security. “The duration and severity of the pandemic will affect the estimates presented in this year’s report and the financial status of the program, particularly in the short term.”
The OASI Trust Fund is projected to become depleted in 2034, the same as last year’s estimate, with 76% of benefits payable at that time.
“What this means is that, in order for Social Security to keep paying benefits, they will either need to increase payroll taxes (and/or the associated thresholds) or adjust benefits,” said Rhian Horgan, founder and CEO of Kindur and retirement planning app Silvur. “In 2020, the FICA tax was 12.4% up to a cap of $137,7000. Over the last decade, this cap has increased from $106,800 providing additional support for Social Security.”
The DI Trust Fund is estimated to become depleted in 2065, extended 13 years from last year’s estimate of 2052, with 92% of benefits still payable.
The Board of Trustees usually comprises six members. Four serve by virtue of their positions with the federal government: Steven T. Mnuchin, Secretary of the Treasury and Managing Trustee; Andrew Saul, Commissioner of Social Security; Alex M. Azar II, Secretary of Health and Human Services; and Eugene Scalia, Secretary of Labor. The two public trustee positions are currently vacant.
Highlights of the report
In the 2020 Annual Report to Congress, the Trustees announced:
- The asset reserves of the combined OASI and DI Trust Funds increased by $2.5 billion in 2019 to a total of $2.897 trillion.
- The total annual cost of the program is projected to exceed total annual income, for the first time since 1982, in 2021 and 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 non-interest income since 2010.
- The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2035—the same as last year’s projection. At that time, there would be sufficient income coming in to pay 79% of scheduled benefits.
- Total income, including interest, to the combined OASI and DI Trust Funds amounted to $1.062 trillion in 2019. ($944.5 billion from net payroll tax contributions, $36.5 billion from taxation of benefits, and $81 billion in interest)
- Total expenditures from the combined OASI and DI Trust Funds amounted to $1.059 trillion in 2019.
- Social Security paid benefits of $1.048 trillion in calendar year 2019. There were about 64 million beneficiaries at the end of the calendar year.
- The projected actuarial deficit over the 75-year long-range period is 3.21% of taxable payroll—higher than the 2.78% projected in last year’s report.
- During 2019, an estimated 178 million people had earnings covered by Social Security and paid payroll taxes.
- The cost of $6.4 billion to administer the Social Security program in 2019 was a very low 0.6% of total expenditures.
- The combined Trust Fund asset reserves earned interest at an effective annual rate of 2.8% in 2019.
Addressing Social Security’s problems
Given the existing forecast of the trust funds being depleted in 2035, and now with 26.4 million fewer people (and their employers) not contributing payroll taxes—which is how Social Security is financed—what might Americans expect in efforts to prop up the only guaranteed source of retirement income for most Americans?
With the likelihood that many now-unemployed Americans who need cash and are eligible for Social Security may start taking it earlier than planned, the trust funds’ cash burn figures to accelerate. So it stands to reason that the big cuts that the Trustees warned about last year will hit even earlier—and perhaps cut deeper.
“The appetite to reduce benefits for retirees is very limited so, similar to the past, we should expect Social Security to use two levers to increase funds. The first is likely to be increasing earnings thresholds so that higher income earnings contribute additional funds,” Horgan said. “Secondly, there is the potential to increase the absolute level of payroll taxes, specifically for high income earnings.”
Horgan added she also expects Social Security to delay when full retirement benefits are paid. “Today retirees can elect Social Security between the ages of 62 and 70, with full retirement generally calculated as age 67,” she said. “In 2017, Social Security delayed full retirement age from 65 to 67, and I wouldn’t be surprised if we saw additional delays, either to full retirement date or to the first date you can elect Social Security, which is currently age 62.”
SEE ALSO:
- Early Predictions for 2021 Social Security COLA
- Increase Social Security Benefits in Coronavirus Stimulus: Warren
- 20 Social Security Facts for 2020
