There is no doubt that the COVID-19 pandemic and associated economic upheaval will likely have lasting and devastating effects on Social Security benefits for millions of Americans.
For years, the long-term viability and feasibility of the Social Security Program as well as the Trust Fund have been hot and trending topics on the minds of legislators, politicians, reformists, and retirees. However, the coronavirus pandemic is causing significant ripple effects throughout the US economy. While some of these economic effects are known, most are still unknown.
Although most stock market investors, such as mutual funds, might have taken a haircut from the COVID-19 crisis, bartenders, waitresses, store clerks, and millions of others have been scalped. Dealing with mounting debt can be an overwhelming and stressful experience for most people. However, as you brace for the potential financial impacts of the coronavirus, you can take several steps to manage debt in these trying times.
COVID-19: Impacts on the US Economy
The coronavirus pandemic has impacted almost every aspect of our everyday life, and, as you can imagine, the Social Security trust fund is certainly not immune. This is why it is important to take control of your finances now to prepare for a better future. Creating a fallback for your Social Security earnings, or lack thereof is one way to take control of the situation.
The global health pandemic and policy responses to the pandemic will have several long-term consequences for the US federal budget and the economy. According to experts, falling wages are likely to have considerable financial implications for the Social Security benefits of people nearing retirement. The COVID-19 pandemic casts a shadow of uncertainty over this year’s data and forecasts.
Reductions in Revenue
Did you know that the coronavirus pandemic can lower Social Security revenue in 3 main ways? Firstly, the loss of jobs in the US, particularly among low-wage employees, considerably lowers payroll tax revenues. It is worth noting that the size of this impact will increase with the length of the recession. Social Security has three main sources of funding, and payroll taxes on earned income top the list.
In 2019, payroll taxes were responsible for nearly 89 percent of the $1.06 trillion that the program collected. So it stands to reason that if people are out of work, then Social Security will generate less in the form of payroll tax revenue, which is cause for concern.
Second, a reduction in interest rates will lower the interest income that the Trust Fund receives. This is because the US Central Bank has lowered the interest rate to a record low of 0% to 0.25%. As a result, Social Security’s asset reserves of $2.9 trillion, which they need to invest in certificates of indebtedness and special-issue bonds, will fetch less interest income for the foreseeable future.
Third, keep in mind that an extended period of low inflation will reduce earnings for all employees. This further reduces tax revenue that the Trust Fund receives.
When there is a big upheaval, such as COVID-19, the ripple effects can quickly show up in your daily budget. This is why taking control of your spending and repaying your debt can help you weather the concrete challenges as well as the fear of the unknown.
Cost of Living Adjustment
You should also note that the coronavirus also has several potential implications for Social Security’s COLA (Cost of Living Adjustment) in 2021. Experts will determine this adjustment by comparing the CPI-W in the 3rd quarter of 2020 with that in the 3rd quarter of 2019. Keep in mind that if the CPI-W doesn’t increase over this period, then the Social Security Administration will not be able to provide any COLA.
While the lack of a COLA should not adversely affect Social Security beneficiaries, because the cost of goods they buy (in theory) also has not increased in price, there is substantial debate surrounding the suitable index for retirees.
Projection: Trust Fund Depletion
According to the annual report of the Social Security and Medicare Trustees, the total asset reserves of the retirement, disability, and survivor programs will deplete in 2035. And this projection has remained unchanged from last year’s report. Also, it is worth noting that the trustees’ predicted that Social Security could pay just 79 percent of projected benefits from current payroll taxes through 2035.
According to the trustee report, this will result in a sweeping 21 percent cut in benefits fifteen years from now. This is when today’s 52-year-olds reach their retirement age while today’s youngest retirees will be 77 years old.
As the economy is changing quite rapidly, you should keep a budget and track expenses. This will help you maintain better control of your financial future, giving you peace of mind.
How the COVID-19 Pandemic is Draining the Financial Pot
Various experts point to three primary reasons.
Unemployment
A significant chunk of the US population is paying considerably less into Social Security. This is because over 30 million people are out of work because of the coronavirus pandemic.
Economic Recession
According to the Bipartisan Policy Center, recipients of Social Security benefits pay taxes on the benefits if their incomes are higher than $25,000 (or $32,000 for couples who file jointly). However, keep in mind that a deep recession suggests considerably fewer beneficiaries will be able to meet these thresholds. As a result, they won’t have to pay tax on their benefits.
Lower Interest Rates
As the Social Security Trust funds have investment bonds that are subject to interest rates, lower interest rates could mean considerably lower bond yields. This means that fewer dollars will flow into the trusts.
COVID-19 and Social Security’s Finances
Amid so much economic and financial uncertainty in the US, the most significant financial impact will likely be a diminution in the payroll taxes, which fund most of Social Security. The Bipartisan Policy Center modeled various scenarios to project the potential impacts of economic recessions of varying length and depth over the coming months and years, noting that if tax revenue to Social Security declines by 15 percent for 2020 and 2021, this will expedite the trust fund’s depletion from 2035 to 2033.
On the other hand, if the economic effect persisted longer, the depletion date may be as early as this decade.
COVID-19 and your Social Security Benefits
An economic downturn or recession will likely affect the Social Security program in several different ways. Mainly, an economic recession will reduce payrolls as employees lose their jobs. And this, in turn, will reduce the income of the Social Security program, which may force a further drawdown of dwindling trust assets.
We know that the program’s solvency is a complicated issue and depends on several other factors. Some of these factors include employees claiming early retirement, policy changes, disability claims, longevity, decline (or growth) in the workforce, and new sources of revenue, such as additional taxes or an increase in the Social Security wage base, which generates a surplus or reduce shortfalls.
When you are certain that your income will be eliminated or reduced because of COVID-19, you should get in touch with each of your creditors and inform them about your situation. Tell them how this pandemic has affected your ability to pay your debts and inquire about various options for financial relief.
How You Can Avoid the Possible Pitfalls of an Uncertain Future
Get Help With Your Mortgage Payments
Many Americans depend on their Social Security payments to make their mortgage and rent payments. With Covid-19 taking its toll on current earnings, and with a lot of unknowns lingering around the future of the program, many payers will find themselves faced with a challenge if they don’t prepare for a possible reduction in the Social Security program.
You should call your loan servicer to determine what options may be available to you as soon as you recognize that you will have trouble making your next mortgage payment. Using social security to pay a debt is a good idea. And, note that you could qualify for forbearances, such as under the CARES Act, or some other type of short-term immediate mortgage relief, including a waiver of any late fees.
Work with Credit Counselors
You may have heard of credit counseling agencies. They are usually non-profit organizations that can advise and guide you regarding your financial issues and debts. Caring, knowledgeable, and compassionate credit counselors will guide you through a comprehensive process to evaluate your financial situation, fully understand your goals, and then develop an action plan to work towards them.
When working with a credit counselor, you must be ready to openly discuss your financial situation, financial goals, employment situation, and standard income and expenses. And when you work with a credit counselor, you should make sure that they can help you evaluate and assess how to manage all your debts, such as student loans.
Corral Credit Cards
Do you have credit card balances? If yes, see if you can qualify for a credit card with lower interest (or even a no-interest introductory rate) and then transfer your balances from high-interest cards. However, keep in mind that there is usually a fee for such transfers.
Final Thoughts
As COVID-19 could affect your future earnings, it is better to manage and repay your personal debt or business debt. This will help you avert serious issues down the road. By addressing your debt now, you can enjoy a stress-free retirement.
