finance

Coronavirus could push Social Security to insolvency before 2030

“This is a train wreck that’s going to happen and you can see it coming."

Blank Social Security checks

Social Security could be insolvent by the end of this decade because of the coronavirus pandemic, according to some new estimates, creating new pressure for Congress to fix the troubled program after decades of inaction.

The last official government projection had the program running out of money by 2035. But some outside economists are looking at the trends and moving up the date when the program starts paying out more than it takes in: Tens of millions of workers are suddenly unemployed and not paying into the government account that funds benefits for retired workers. At the same time, a flood of older Americans who’ve lost jobs are expected to start drawing benefits as soon as they’re eligible.

It’s unclear whether the new timeline is enough to force lawmakers into finally acting given that it’s been almost four decades since they last shored up the Depression-era program — and solutions like raising taxes, cutting benefits, or raising the retirement age are politically difficult.

But the current crisis is accelerating the day when Congress can no longer avoid making tough choices about the program, which covers an estimated 178 million workers and provides monthly cash benefits to more than 64 million beneficiaries.

“There’s going to be a real reckoning,” said Rep. John Larson (D-Conn.), who chairs the House Ways and Means Social Security Subcommittee and has proposed raising both benefits and taxes. “This is going to get people's attention.”

Rep. Steve Womack, the ranking Republican on the House Budget Committee, likened the coming crunch to bailing “water from a sinking boat when you’ve got alligators nipping at you. And the alligators are Covid-19.”

“This is a train wreck that’s going to happen and you can see it coming,” said the Arkansas Republican.

There's now an acceleration of what happened during the Great Recession a decade ago, when there was a 5 percent bump in eligible adults claiming Social Security an average of six months early. At the same time, soaring unemployment meant the government was collecting less in payroll taxes. The Obama administration estimated at the time that the fund would run out of money in 2037 — four years faster than expected before the financial crisis.

Today, the unemployment rate has already blown past the 10 percent peak logged during that recession, to 14.7 percent as of mid-April, according to data released this month. And some economists think it could climb as high as 20 percent. It’s estimated that 1 in 10 Americans still won’t have a job well into next year.

At least 36.5 million people aren’t paying payroll taxes into the program right now, and a second surge in early retirements is expected. Social Security benefits can be collected at the age of 62, though there is a penalty for not waiting until full retirement age.

Without accounting for the pandemic and the ensuing financial downturn, the federal government estimated last month that the program can fully issue benefits until 2035. At that point, only 76 percent of benefits can be paid out.

“It’s clearly going to be a lot worse than that,” said Alan Auerbach, an economist at the University of California, Berkeley.

When accounting for the pandemic, the Bipartisan Policy Center estimates that the depletion date will move up from 2035 to 2029.

But any discussion will inevitably be fraught with the politics of entitlement reform, against the backdrop of gaping federal deficits and a debt-to-GDP ratio unseen since World War II. Much will hinge on the makeup of Congress and who occupies the White House after the 2020 election.

Congress never acts until it’s almost out of choices, said Womack, who himself is recommending a commission to study the issue and make recommendations to lawmakers instead of embracing a specific solution.

“I don’t know when we’re going to decide to take up the issue,” he said. “I hope and I pray that it‘s not when we have no other real options other than something draconian like big cuts or the fact that we’ve got to infuse a bunch of capital into the program to save people from a loss of benefits.“

Rep. Tom Reed (R-N.Y.), Larson’s GOP counterpart on the Ways and Means Social Security Subcommittee, also endorsed the idea of a commission, in addition to raising the eligibility age for the program. Reed conceded that a commission would give squeamish members a little cover from making tough choices themselves.

“It pains me to go on the record and say that about my colleagues and our leadership, but it is the reality of D.C.,” he said.

Larson has introduced a proposal called the Social Security 2100 Act, which has gained attention but hasn’t moved in Congress. The bill would increase benefits and payroll taxes that are paid into the program. It would also apply the payroll tax to wages greater than $400,000, up from the current $137,700.

The conservative Heritage Foundation last year panned the bill for “broadening Social Security’s size and scope, raising taxes on all workers, and leaving them with less money to meet their daily needs.”

“This is a very politically problematic situation and Congress, by its very nature, doesn't like dealing with politically problematic situations,” Womack said. “You’re going to have to take a vote to do something to save these programs and it’s going to be very unpopular with a lot of people. It’s probably going to be career-ending for some people.“

But with tens of millions of people out of work, Larson and others think the outbreak could spark a newfound appreciation for Social Security, both as a reliable monthly payment and an economic stabilizer.

“I think it will come out of this pandemic looking really good and that people will value it a lot,” said Alicia Munnell, the director of the Center for Retirement Research at Boston College.

The pressure to find a long-term funding fix will be compounded by the fact that the program serves the population most vulnerable to the virus — older adults, particularly minorities and low-income individuals, Larson noted.

If Democrats win the White House and control a majority of Congress, there could be momentum around proposals to increase benefits, impose the payroll tax on higher-income taxpayers and institute a wealth tax in order to generate more revenue, Auerbach said.

Trump has vowed not to cut Social Security, but Republicans have sought in the past to curb federal spending on the program.

The president is now pushing a payroll tax cut in the next round of pandemic relief, which both Republicans and Democrats worry would harm the social safety net and do little for the tens of millions of people who aren’t collecting a paycheck.

The Trump administration has also considered — and rejected — a plan penned by two conservative scholars that would allow Americans to receive checks of up to $5,000 in exchange for a delay of their Social Security benefits, The Washington Post reported.

White House spokesperson Hogan Gidley said in a statement that “the mere thought of this so-called ‘plan‘ is ludicrous on its face — as President Trump has been clear that while he is in office, the American people can feel secure without a shadow of a doubt that he will completely protect Social Security and Medicare — end of story, full stop.“

Social Security is financed by a 12.4 percent tax on earnings of up to $137,700, with the tax split evenly by employees and their employers. About 40 years ago, Congress set the taxable earnings cap to cover about 90 percent of all wages, with increases annually to reflect average wage growth. But in 2017, the cap only covered 83 percent of earnings, thanks to rising wage inequality and growing health care costs.

Former Vice President Joe Biden has said he would levy the 12.4 percent tax on wages above $400,000 in order to push the program toward solvency.

Even with swift action once the pandemic ends, reforms could take years to implement, Auerbach noted. The federal government’s general fund might have to prop up Social Security’s trust funds at some point, he said.

“Congress won’t be able to come up with any politically palatable changes that produce enough revenue or enough reductions in benefits soon enough to make the system viable over the long-term,” Auerbach said. “So they may need extra money."