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COVID-19 May Deplete Social Security Trust Funds This Decade

Millions of Americans depend on Social Security for their financial wellbeing. Social Security’s finances, in turn, depend largely on the strength of the economy. Recessions cut the program’s revenues and raise its costs. Social Security’s board of trustees released its 2020 annual report on the programs’ finances today, but the economic fallout from COVID-19 has become apparent too recently to be incorporated into the board’s estimates.

In this blog’s preliminary analysis and a more detailed report to be released soon, we fill that gap by providing illustrative estimates of the expected economic downturn on Social Security’s finances. Our preliminary analysis finds that the Disability Insurance (DI) trust fund’s reserves may be depleted during the next presidential term, and the Old-Age and Survivors Insurance (OASI) trust fund’s reserves may be depleted right around the time of the 2028 presidential election. These projections reflect a substantial further deterioration in the finances of a program that was already facing a large mismatch between income and outlays, making the need for action by policymakers even more urgent.

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The Social Security trust fund and the economy

Most of the money that Social Security pays out in retirement and disability benefits comes from payroll taxes; the programs get some additional income from the taxation of benefits and interest earned on securities held by the trust funds. All three revenue sources are threatened by the current recession. A laid-off worker doesn’t pay payroll taxes (nor does the employer share of their payroll taxes get paid), and more than 26 million Americans have lost their jobs in the past five weeks. Even for workers who keep their jobs, many have experienced a cut in hours, and a slack labor market holds down wages, further depressing payroll tax revenue. Meanwhile, Social Security recipients pay taxes on their benefits if their incomes exceed $25,000 ($32,000 for a couple filing jointly). A deep recession means fewer beneficiaries will meet these thresholds—through, for example, investment income—so their benefits won’t be taxed. Finally, the Federal Reserve has responded to the crisis by cutting interest rates, which will lower the yield on bonds held by the Social Security trust funds. All of these effects make the trust funds smaller, further reducing their interest income.

A recession increases program outlays, as well. When many workers lose their jobs, claiming rates for Social Security Disability Insurance typically rise. A wave of older workers who are forced to retire earlier than they had hoped would likely lead to additional claims of OASI benefits, raising costs in the short term.

The trust fund during the Great Recession

Because of this combination of lower revenues and higher costs, the last economic crisis significantly accelerated the depletion of reserves in the Social Security trust funds. At the start of 2008, before it was clear that the United States had plunged into a recession, Social Security’s trustees projected that the combined reserves of the retirement and disability (OASDI) trust funds would be depleted in 2041.1 In 2012, after several years of a dismal labor market and sluggish economic growth, that date had moved up to 2033.

What would happen if we had another Great Recession?

It is far too early to judge how severe the current recession will be or how long it will last. Instead of relying on a highly uncertain forecast of future economic damage, our methodology begins by estimating how Social Security’s trust funds would fare if the current downturn were roughly equivalent to the Great Recession. We then model more and less severe variants of the Great Recession to estimate a range of possible outcomes.

We estimate the effect of the Great Recession by comparing the Social Security trustees’ projections from 2008—the last official forecast that didn’t incorporate the Great Recession—to the trust funds’ actual income and costs over the ensuing years. To simulate a second Great Recession, we assume that over the next 10 years, Social Security revenue and excess costs from additional claims of retirement and disability benefits change as they did from 2008 through 2017.2 Since we measure the fall in total revenue, we capture the effect of lost payroll taxes, lost taxation of Social Security benefits, and lower interest income earned by the trust fund.

We make a few adjustments to these numbers to reflect current circumstances. First, we adjust the added cost from more older Americans claiming retirement benefits to account for the fact that the eligible population is larger today. Second, because the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act temporarily increased unemployment insurance payments by $600 per week and expanded eligibility, disability insurance claims may not rise by as much as they did during the last downturn. We therefore increase DI costs in 2020 by less than the amount implied by the Great Recession. Finally, the coronavirus will tragically end the lives of many seniors, who will therefore not receive (or stop receiving) Social Security benefits. We use estimates on how many older Americans will die from the virus and lower program costs accordingly.

Based on these assumptions, we estimate that another economic downturn with severity and impacts similar to the Great Recession would accelerate the depletion date of the OASI trust fund reserves from 2034 (projected in this year’s trustees’ report) to 2029, the depletion date of the DI trust fund reserves from 2065 to 2024, and the depletion date of the combined (OASDI) trust fund reserves from 2035 to 2029 (see Figure 1-3). We emphasize that these are preliminary estimates that will be revised in a forthcoming report. If trust fund reserves were depleted, benefits could be paid only from program revenues, triggering a cut of 31% in retirement benefits and 16% in disability benefits.3

Figure 1: End-of-year OASDI Trust Fund Balance

Figure 2: End-of-year OASI Trust Fund Balance

Figure 3: End-of-year DI Trust Fund Balance

Social Security’s trustees would consider these trust funds financially inadequate in the short term if, at any time in the next 10 years, they lack sufficient reserves to cover one year of scheduled benefits. In the results above—and all results examined later, even under milder recessions—all three trust funds fail the test. This would be the first time that the OASI trust fund would face short-term financial inadequacy since the test was introduced in 1991.

As Figure 4 shows, notwithstanding the various assumptions laid out above, almost the entire effect of another recession on the OASDI trust fund would come through reduced revenue. (When the DI trust fund is looked at individually, increased disability claims account for around one-third of the depletion of reserves in the DI trust fund.)

Figure 4: Cumulative Contributions to Difference in OASDI Trust Fund Balance Through the End of 2029

It is important to note that our method doesn’t assume the coronavirus recession would mirror the Great Recession’s shape. For example, even if this recession involves a deeper initial plunge and a faster recovery than the Great Recession, as long as total trust fund losses would be the same by a particular date, the distribution of losses over time won’t affect these results. Nevertheless, there is no reason to believe that the current recession will have the same magnitude as the Great Recession, let alone within a particular time horizon. Instead, our results are merely meant to give a concrete idea of one of the many ways the coronavirus recession may play out.

Variations on the Great Recession

In that spirit, we simulated recessions of varying intensities. In one scenario, the current recession cuts revenue by twice as much as the Great Recession and raises costs by twice as much. Keep in mind that the annual average unemployment rate was more than 8% as late as 2012, so a recession twice as large would be a severe and protracted economic contraction. We also simulated two shorter recessions. In one, we suffer a downturn akin to the worst two years of the Great Recession before the economy bounces back twice as fast. In another, the impacts parallel the Great Recession for its worst three years before the economy rebounds twice as fast. Results of these scenarios are summarized in Table 1.

Table 1

 Year of OASDI reserve depletionYear of OASI reserve depletionYear of DI reserve depletion
Baseline203520342065
Another Great Recession202920292024
Double Great Recession202620262022
Two-year Great Recession, faster recovery202920292024
Three-year Great Recession, faster recovery202920292024

Notably, the accelerated trust fund depletion dates come just as soon in even our mildest scenario. In the worst-case scenario modeled, of a recession twice as severe as the Great Recession, the DI reserves would be depleted in 2022, while the combined OASDI reserves would be depleted in 2026. Again, none of these scenarios should be viewed as a prediction of how the current recession will unfold nor of how Social Security’s finances will look by its end. We certainly hope this recession will turn out to be less severe than any of our alternatives. Rather, these results attempt to give a numerical sense of the impact on Social Security’s trust funds should the current recession match familiar benchmarks.

A coming crisis

In each variation of the Great Recession—even one lasting only two years—the reserves in each Social Security trust fund are depleted in this decade. The closer those dates come, the more difficult it will be to find policy solutions that maintain the traditional financing structure of the program. If policymakers fail to address Social Security’s financial imbalance soon, they will have to pursue some combination of sharply increasing taxes, drastically cutting benefits, or financing promised benefits through general revenues—turning Social Security from a self-financing insurance program into a perennial drain on tax revenues that are sorely needed elsewhere.

For years, the trustees have warned that policymakers need to act to avoid depletion of reserves in Social Security’s trust fund. But now that moment will arrive sooner than anyone expected.

End Notes

1 The two trust funds are legally distinct and are not allowed to borrow from one another under current law, so the projected depletion of their collective reserves is illustrative.
2 Income and costs differed from the trustees’ 2008 projections for two recession-related reasons: 1) the real economic shock of the recession and 2) inflation that was much lower than expected in the ensuing years. We purge the effect of lower inflation from all estimates of the Great Recession’s impacts in order to estimate real effects. We also recognize that many factors other than the direct effects of the recession (such as low productivity growth during the recovery) may have contributed to the difference between projected and actual program income and expenditures. Our methodology assumes similar impacts from the combination of these factors over the upcoming ten years.
3 The latest trustees report estimates that reserve depletion would trigger a cut of 24% in retirement benefits and 8% in disability benefits. Our estimates imply more severe benefit cuts because program revenues–the only source of benefit payments once trust fund reserves are gone–are lower due to lingering economic impacts from the current recession.

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