Call it another casualty of the COVID-19 pandemic.
The Social Security and Medicare trust funds, already in ill health, are about to become sicker from the coronavirus. The economic recession triggered by the pandemic means a drop in payroll tax revenues that finance the trust funds.
While projections vary and remain highly uncertain, economists and policy analysts across the ideological spectrum say the trust funds are now likely to deplete their reserves at a quicker pace than they would have before the pandemic hit. The net effect could shave years off the time lawmakers have to find a financial fix for the trust funds before they become insolvent.
“We should have been concerned about it even before the virus hit,” said Charles Blahous, a research analyst at the Mercatus Center at George Mason University who served as a public trustee of Social Security and Medicare from 2010 through 2015. The pandemic, he said, “is going to make things worse faster.”
The annual report from the Board of Trustees, issued in April, forecast that the combined Social Security trust funds — known as Old Age, Survivors and Disability Insurance — would be depleted by 2035. At that point, new payroll tax revenue would only be able to fund 79 percent of promised Social Security benefits.
And Medicare’s Hospital Insurance trust fund would run out of money by 2026, at which point it would be able to cover only 90 percent of incurred costs. But the trustees noted in their report that they had not accounted for the economic effects of the pandemic.
An analysis by the Bipartisan Policy Center in April showed what could happen to the Social Security trust funds, depending on the severity of any economic downturn. The Old Age and Survivors Insurance trust fund reserve, currently projected to be depleted in 2034, could now run dry by 2029 if the economy suffers something similar to the Great Recession of 2007-2009.
And if the pandemic produces an economic hit that is twice as severe as the Great Recession, the reserve could be depleted even sooner, by 2026, the study found.
Dire disability forecast
Even more dramatic is the pandemic’s potential effect on Social Security’s Disability Insurance trust fund. The Board of Trustees, without accounting for the pandemic, projected that fund wouldn’t run dry until 2065.
But the Bipartisan Policy Center forecast suggests another Great Recession would accelerate that timeline by decades. In that case, the fund would be depleted by 2024, it said. A recession twice as severe would cause the fund to run dry by 2022.
“Disability [insolvency] is probably going to move forward by decades,” Blahous said. That’s because the disability trust fund, along with Medicare’s Hospital Insurance trust fund, operate with very little margin for error, he said. They typically hold enough reserves to pay only seven or eight months of benefits before they would run dry.
So, an unexpected drop in payroll tax revenue for those funds, he said, would have a much bigger impact than the more flush Old Age and Survivors Insurance fund. “It only takes a slight push to go from stability to drawing down rapidly,” he said.
Stephen Goss, chief actuary for the Social Security Administration, suggested in a Bipartisan Policy Center webinar discussion in April that the center’s forecast may be too pessimistic. If there is a 15 percent reduction in payroll tax revenue and earnings for all of 2020, he said, the combined Social Security trust funds would run dry by the middle of 2034 instead of early 2035.
“It would cost us a little over one-half of a year in the reserve depletion date,” he said. By contrast, the center’s forecast of a much earlier depletion would require a decline in revenue that is 30 percent greater than was suffered during the Great Recession, he said.
The Penn Wharton Budget Model, a research project of the University of Pennsylvania, offered its own forecast last month that appeared in line with Goss’s estimates. It found that a speedy "V-shaped" economic recovery would deplete the combined Social Security trust funds by 2034. A slower “U-shaped” recovery would empty the fund by 2032, it said.
The Penn Wharton study said revenue would decline because of a loss of jobs, which reduces payroll tax revenue, and low interest rates, which reduce interest income the fund receives.
But the pandemic’s death toll reduces the benefits to be paid out of the fund, it said. And lower inflation reduces the cost-of-living increases to benefit payments.
“There’s so much uncertainty in this,” said G. William Hoagland, a senior vice president at the Bipartisan Policy Center who was a longtime Senate Republican budget aide.
On one hand, mass unemployment leads to a drop in payroll tax revenue. And some workers could be encouraged to retire early if jobs are scarce, thereby increasing the drawdown on benefits, Hoagland said.
On the other hand, he said, “some people may decide to work longer,” if they had to draw down money from their 401(k) accounts or other assets to weather the recession. And roughly $3 trillion in economic relief enacted so far could limit the damage and speed up recovery efforts.
Alicia Munnell, director of the Center for Retirement Research at Boston College, said she agreed that Social Security’s reserve depletion date would likely be quickened as a result of the pandemic. But she cautioned against focusing on any particular date, even though it may serve as a trigger point for congressional action.
More important, she said, is the long-term structural imbalance between revenue and benefits that will require a fix — no matter precisely when reserves dry up.
“Whether it happens in 2035 or 2033 doesn’t seem like that big of a deal,” Munnell said. “The costs go up as the baby boom retires. … And I don’t think you’ll have a dramatic shift in the revenue curve. They move at glacial speeds. But as soon as we get through this mess, we ought to solve the problem.”
Lawmakers in both the House and Senate have introduced legislation that calls for creating “rescue committees” to recommend a financial fix for the trust funds. But analysts from the left and right say it’s more likely Congress decides to close any shortfall by borrowing more from the Treasury.
“I’m beginning to think what Congress is going to do is just authorize borrowing to finance the trust fund,” said William Gale, an economist at the Brookings Institution, who agreed the pandemic would make the problem harder to solve. “Interest rates are low, so it would impose lower costs on the government than it otherwise would.”
And Andrew Biggs, a resident scholar at the American Enterprise Institute, agreed that any acceleration of the depletion date would simply trigger more borrowing. “We're already transferring a lot of general tax revenues (basically, income taxes) to Social Security to repay the trust fund,” he said in an emailed statement. “The obvious thing is that Congress continues those transfers or does something similar, so the chances benefits will be cut are close to zero.”
Even so, the pandemic shines a spotlight on a long-term financial problem that isn’t going away and may now be getting worse.
“We’re running out of time to procrastinate,” said the Mercatus Center’s Blahous. “We should have dealt with it before we had a public health crisis and didn’t.”