Social Security Catches COVID [3 BIG Problems]

Dear Rich Lifer,

 

Social Security has been flirting with disaster for a long time.

I’ve been warning about the system’s financial deterioration for many years, and the situation has only been worsening the entire time.

And now, we can only sit back and watch as the ongoing COVID crisis accelerates the problem further.

All told, in fact, I see three new possible issues caused by the pandemic.

Before I go through them, let’s summarize the current state of affairs when it comes to our national retirement system.

Here’s what the Trustees say in their latest annual report:

Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs. The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare.

 They go on to explain:

“Social Security’s total cost is projected to exceed its total income (including interest) in 2020 for the first time since 1982, and to remain higher throughout the remainder of the projection period. Social Security’s cost will be financed with a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury until 2035 when the OASDI reserves will become depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2093. The ratio of reserves to one year’s projected cost (the combined trust fund ratio) peaked in 2008, generally declined through 2018, and is expected to decline steadily until the trust fund reserves are depleted in 2035.

In plain English:

First, Social Security – which primarily funds outgoing payments through ongoing contributions from current workers and their employers – is already taking in less than it is paying out.

Second, to make up for those shortfalls it is burning through the money it has in the bank.

Third, 15 years from now, it will have depleted that money and will only be able to pay about 75% of what you are being promised on your current statements.

Of course, these are only estimates and COVID-19 is going to make things worse.

The Obvious Problem

Let’s start with the most obvious effect of this disease outbreak: Massive unemployment, which means even less money getting put into the system.

If Social Security was already paying out more than it was receiving, you can imagine what happens now that more than 26 million people have lost their jobs over the last five weeks.

Now maybe this is all a very temporary situation and thus a relatively quick hit to Social Security’s finances.

Or maybe the numbers worsen further … or the trend is drawn out further … or we see a second wave.

Really there is no “good” scenario.

Remember, those missing contributions do not get replaced.

The best case is that Social Security is taking another painful-but-quick hit.

The worst case is currently unknowable.

Meanwhile, it is very likely that the other side of the equation – payments going out – will also worsen because of COVID-19.

Some of the newly-unemployed are at retirement age. They might not have jobs to come back to and will have to start collecting benefits to make ends meet.

Other eligible Americans might simply choose to start taking payments to supplement their income even if they remain employed… 

ANOTHER Stimulus Package?

There are many different scenarios to consider but they all point to more money coming out of the system sooner than previously estimated.

That creates a new strain on both sides of Social Security’s financial statement.

Which brings me to one extra possibility that we should keep in mind: A future stimulus package that includes a temporary payroll tax cut.

At one point before the CARES Act was passed, some lawmakers – including Donald Trump – were suggesting just such a move.

At the time, I told you why that didn’t make sense.

But just to summarize:

“There is no such thing as a free lunch.

 “A payroll tax cut puts more money into our pockets right away, which has a stimulative effect on the economy.

“Though in this case, even that is questionable if the concern is that activity will simply cease as people stay home and do nothing. 

“Meanwhile, what is absolutely certain is that we will end up with a greater Social Security shortfall going forward.

“That means higher taxes in the future … benefit cuts … new means testing for wealthier Americans … and/or other draconian measures.

“This is what politicians – Obama, Trump, Congress or anyone else — mean when they say they’ll ‘make up the lost revenue.’”

Obama’s payroll tax cut was bad enough.

If we see another one at any point from here on out, it will only be worse.

 And I’m saying that as a self-employed person who would greatly benefit from just such a cut!

By the way, the CARES Act already created a payroll tax holiday for employers. Companies now have until 2022 to make their 2020 contributions. It’s quite likely some of them won’t be around to ever do it. 

So I hate to be the bearer of more bad news, but whatever way you look at it, Social Security has been infected with COVID-19 … and it was already an at-risk patient going into this crisis.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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