The coronavirus outbreak’s impact has been widespread across all aspects of life as the economy has been forced into a standstill, and that looks to be a bad sign for Social Security’s future.

Businesses are shuttering operations or greatly decreasing output, causing over 26 million Americans to file for unemployment over the last month. And that will only end up hurting Social Security’s future in the long run.

While Social Security has been around for decades and provided aid to millions of Americans, funding for the program has been in doubt for quite some time now. The 2020 report from overseers to both Social Security and Medicare projects funding will become insolvent by 2035.

The trusts that fund Social Security will never go completely bankrupt, but if the benefits program becomes insolvent it will decrease payouts by 21%, according to the Social Security Board of Trustees.

And the economic shutdown caused by the coronavirus is only contributing to Social Security’s grim future.

How the Coronavirus Is Hurting Social Security’s Future

Before we get into how the COVID-19 pandemic is hurting Social Security’s future, let’s take a closer look at how Social Security is actually funded, per The Motley Fool:

  • Payroll tax: A 12.4% payroll tax that’s applied to earned income (i.e., wages and salary but not investment income) ranging between $0.01 and $137,700, as of 2020. This upper bound increases annually on par with the percentage increase in the National Average Wage Index.
  • Taxation of benefits: Single-filing taxpayers with modified adjusted gross income (MAGI) plus one-half of benefits above $25,000 will owe some amount of federal tax on a portion of their Social Security payout. For couples filing jointly, this MAGI-plus-one-half-of-benefits formula begins taxation above $32,000.
  • Interest income: The Social Security Administration is required by law to invest its net-cash surpluses into special-issue bonds and certificates of indebtedness. These bonds and certificates of indebtedness pay interest to the Social Security program.

Most of Social Security’s funding comes from the first category: the payroll tax. Looking at 2019 data, of the $1.062 trillion collected, roughly $944 billion of funds came from the payroll tax, which is great when you have payrolls to actually tax.

Over 25 million people have filed for unemployment since mid-March, so that’s 25 million paychecks that aren’t getting taxed right now. On top of that, unemployment benefits are exempt from any payroll tax. While the shutdown is only temporary, there is no telling how long recovery is going to take, and that raises a lot of questions for Social Security’s future.

Investing data for Social Security’s asset holdings show an outflow of around $6 billion between the end of February and the end of March, according to The Motley Fool. It may have only been drops in a bucket for the trust that still holds $2.9 trillion, but the board of Trustees had already projected 2020 to be the first year funds leaving outpace funds coming in — and that was before the COVID-19 shutdown.

This economic halt is far from over as well, and it would not surprise me to see outflows from the trust increase in April and May. The 2020 trustees data does not reflect any impacts from the COVID-19 outbreak.

“The projections in this year’s report do not reflect the potential effects of the COVID-19 pandemic on the Social Security program,” Social Security Administration Commissioner Andrew Saul said in a Wednesday press release. “Given the uncertainty associated with these impacts, the Trustees believe it is not possible to adjust estimates accurately at this time.”

Social Security’s future isn’t in danger in the sense that it will completely disappear, but the insolvency date could easily move up if the economic recovery takes longer than some are expecting.

Reforming how Social Security is funded has been on the docket for many U.S. lawmakers, but the coronavirus outbreak is revealing how economic shocks like we are experiencing now affect Social Security’s future.

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