What Effect Does the Covid 19 Pandemic have on Social Security?
By now, you probably know someone who has gotten severely ill from COVID-19. You may know people who have died. This pandemic has affected every aspect of American life, from preschoolers in paper masks to nursing homes emptied by a staggering death toll.
One unexpected area where the pandemic may have a lasting impact is on the Social Security fund. We have all heard rumors that Social Security will run out of money and be unable to pay recipients because more people are living longer lives and fewer people are working and contributing to the fund. While the death toll from the pandemic has certainly been staggering, it has not significantly impacted the projected number of recipients of funds or contributors. Instead, because of the shutdown of the economy, layoffs, and great resignation, it is expected that there will be a massive reduction in the amount of money going into the fund.
In short, we may have to prepare for a life with reduced Social Security payouts sooner than expected.
How the Social Security trust fund works
You probably know a general principle here: workers pay a Social Security tax and that goes to fund this great pension plan that covers senior citizens and disabled individuals. For quite some time, it has been clear that the amount of money contributed via taxes does not cover the amount that is being paid out — people are living longer and collecting more than was expected. The Social Security fund has been running negative for years, burning away cash reserves in an inevitable march towards insolubility.
The expectation was that at a certain point in the future, recipients would be forced to take a pay cut. According to investopedia.com, this pay cut would amount to 79% of today’s full benefit amount. The reduction in individual benefits would ensure that the amount of money being paid out will match the amount of money coming in, essentially running the Social Security trust fund at a breakeven pace.
When? It was expected that all reserves would be exhausted in 2035, necessitating a pay cut at that time. Now, the current projection is 2033 due to a drop in payroll taxes.
Why are payroll taxes down?
The shutdown, basically. In most of the country, it was believed that the best solution to the ongoing pandemic was to simply shut everything down, except for a few essential businesses. This wreaked havoc on large parts of the economy, but especially on wages. While the government stepped in and provided unemployment benefits to the workers, lessening their pain, nobody was paying federal payroll taxes for all of those laid off or furloughed employees.
In addition, other factors like ongoing layoffs, restructuring, wage reductions for remote workers, and the so-called “great resignation” are all contributing to an expected drop in payroll taxes that experts think will affect both 2020 and 2021, at a minimum. And given the recent finding of yet another COVID variant, nobody knows what 2022 holds in store.
Who will be affected?
The biggest impact might be on new applicants for Social Security benefits. According to investopedia.com, if you turned 60 in 2020, a lowered National Average Wage Index (NAWI) means you will have lower initial benefits because benefits are determined by the index, which factors in average wages against inflation and cost of living.
However, if inflation keeps up at its current rapid pace, in terms of raw dollars you might end up seeing an increase in a year or two. For the year 2022, the government has already announced a 5.9% increase in benefits for current recipients due to a cost-of-living increase spurred by inflation and skyrocketing consumer price index.
The other group that may be affected are Social Security disability applicants. It is expected that there will be an increase in applicants for disability due to the lingering effects of COVID-19. If this large influx of applicants happens, it may increase waiting times for new applicants. It is expected that the increase in applications will return to the normal baseline levels by the year 2023.
What Does This Mean For You?
We would be lying if we told you that we knew exactly what was going to happen with Social Security wait times and benefit amounts in the coming years. Nobody knows what will happen with the pandemic, the economy, or the tax revenues that fund Social Security benefits.
What we can tell you is that knowledge is the best way to prepare for what is shaping up to be an unpredictable future for the program. The confluence of a lower wage index, rising consumer cost-of-living and inflation, and a projected shortfall in funding for the program that is inching closer and closer to today’s date mean that the situation will change by the minute. If you are applying for benefits right now, the best thing you can do is to secure the services of an attorney to help speed the process along, as there is currently an influx of applicants due to the pandemic. We can connect you with an attorney in your area that is experienced in pursuing benefits so that you stand the best chance of getting your benefits as quickly as possible.