Is The Pandemic The Death Nail for Social Security?

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Is The Pandemic The Death Nail for Social Security?
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Social Security and Medicare are federal programs that provide qualifying populations – people who meet certain criteria- with financial support and health insurance. The beneficiaries of these programs are mostly older Americans and people with disabilities.

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According to projections published in the annual Social Security and Medicare trustees reports, the recession caused by the coronavirus pushed Social security a year closer to insolvency while Medicare's depletion date remains unchanged – estimated in 2026. Social Security will no longer be able to provide full benefits starting from 2034 instead of 2035 – the date estimated in last year's projections.

One of the reasons for this change is the widespread unemployment we experienced in 2020 because of the pandemic. Because Social Security benefits are paid out of workers' wages and from additional contributions from their employers, rising unemployment means fewer people are contributing. Over 22 million people were unemployed in April 2020, and the national unemployment rate remained high until earlier this year when the COVID-19 vaccines became widely available.

How Does Social Security Work?

Social Security is often described as a "pay-as-you-go" retirement program. The program is funded by current workers and their employers, who contribute through payroll taxes. The money is deposited into the Social Security Trust Fund and used to pay benefits to current recipients.

Initially, the amount put in from employees exceeded the amount taken out for recipients. However, since the number of workers has decreased while the number of recipients has increased, this is no longer the case. If nothing is done, the Social Security Trust Fund will eventually run out of money.

When that happens, those who collect Social Security will receive their part of what workers currently put in, and, according to the Social Security Administration's (SSA) 2020 annual report, this will mean only 79% of today's full benefits.

COVID-19 has nothing to do with any of this. The possibility of the Social Security Trust Fund being depleted was always inherent in the system, but the pandemic certainly accelerated the process.

The date when the Social Security Trust Fund will reach zero has been moved up because payroll taxes are likely to fall for several pandemic-related reasons such as:

  • Higher rate of unemployment caused by businesses closing
  • Reduced pay as a result of reduced hours
  • Deferral of payroll tax withholding to provide relief to employees and businesses
  • More people applying for unemployment benefits

The amount of Social Security payments you receive is determined in part by the National Average Wage Index (NAWI), which measures inflation by tracking wage growth. Because of the impact the pandemic has had on the economy, the 2020 wage index is likely to be lower than normal.

The Social Security Administration uses the wage index from the year when you reach the age of 60 to calculate your lifetime benefit amount, which means that if you reached this age in 2020, your Social Security benefits will also be lower than normal.

The Congressional Budget Office (CBO) indicated in September 2020 that the NAWI would fall by 3.8 % compared to 2019. The CBO, on the other hand, stated in January 2021 that it anticipates the 2020 NAWI decline to be closer to 0.5 percent. This means that benefits for those turning 60 in 2020 will be lower, although not as low as previously expected.

Furthermore, COVID-19 survivors, according to Social Security actuaries, may experience long-term health repercussions, resulting in an increase in the number of people seeking Social Security disability payments in 2021, 2022, and 2023.

Long-Term Impact on Social Security

Social Security actuaries reported on March 17, 2021, that COVID-19's long-term effects on Social Security would be minimal, with any pandemic-induced recession recovered by 2023.

In the near future, however, the agency forecasts a number of outcomes that will have an impact on Social Security, including the following:

  • Reduced birth rates in 2020 and 2021
  • Increased mortality rates in 2020, 2021 and 2022
  • Higher number of disability applications in 2021 and 2022
  • GDP, productivity, and income level will be permanently reduced by 1%.

In the 1980s, financial concerns about Social Security pushed then-President Ronald Reagan and lawmakers from both parties to collaborate on a long-term solution plan. Unfortunately, given the current political climate, such a step is not likely.

Democrats are in charge of both the White House and Congress, and they've promised that Social Security would be protected.

The most recent estimates reflect the push and pull of numerous factors resulting from the pandemic. It could take several years to fully appreciate the magnitude of its impact.

The death toll from COVID-19, which was primarily among the older population, also had an impact on future Social Security benefit payments.

As of August 25, 2021, 623,985 people in the United States had died as a result of COVID-19, with 78.7% being 65 or older. Millions of people on Social Security and Medicare who survived the COVID-19 pandemic have been affected — or will be affected — by the pandemic's implications on these two programs.

The surge of COVID-related patients put hospitals under strain, but on the other hand, Medicare didn't have to pay for as many common treatments like colonoscopies and knee surgeries.

Birth rates and immigration, both of which are vital for future funding of these programs, have also declined.

The loss of payroll tax revenue for Social Security far outweighed any savings the program would have achieved from what it would have paid out to pandemic victims.

"The finances of both programs have been significantly affected by the pandemic and the recession of 2020," the trustees explain. However, "given the unprecedented level of uncertainty," no consensus was reached on the long-term consequences.

Actually, there are two separate trust funds for social security: the Old Age and Survivors Insurance fund (OASI) and the Disability Insurance (DI) trust fund. The 2034 prediction comes from analyzing these two funds combined, but when examined individually, the figures show that the OASI fund, which is used to pay for retirement and survivor benefits, is expected to run out one year earlier in 2033. After that, it will only be able to pay 76% of benefits.

The DI trust fund is expected to run out in 2057, eight years earlier than predicted in last year's report, with 91% of benefits still payable.

A reduction of this scale would cause a commotion in the political arena. A future Congress might explore ways to recover lost revenue by expanding government borrowing, increasing payroll taxes, or both.

What About Medicare?

Medicare is a program that provides health insurance for adults 65 and older, as well as disabled or end-stage renal disease patients under 65. Medicare is managed by the Centers for Medicare and Medicaid Services (CMS) – a branch of the US Department of Health and Human Services (HHS) – and it's financed through payroll taxes, government funding, and participant premiums.

Medicare uses two funds: the Hospital Insurance (HI) Trust Fund that covers Medicare Part A – hospitalization – and the Supplemental Medical Insurance (SMI) Trust Fund that covers Medicare Part B – medical – and Part D – prescription drugs.

Just like the Social Security Trust Fund, most of the money for the Health Insurance Trust Fund comes from payroll taxes. And, as with Social Security, the HI Trust Fund was underfunded even before the pandemic. We expect this fund to be depleted as well by 2026, when it will no longer be able to completely cover Part A costs. Starting from 2026, the fund will only cover 90% of costs. That said, it should be noted that the effects of the pandemic were not taken into account in these predictions.

The SMI Trust Fund will never be depleted because most of the money comes from premiums and government funding. However, rising premium costs and reliance on greater government support will also put this fund at risk. As shown in a Congressional Research Service (CRS) analysis, as care has transitioned from inpatient (Part A) to outpatient (Parts B and D), beneficiary premiums and government funding started covering a higher portion of Medicare spending.

Medicare trustees estimate that the share of personal and corporate income taxes needed to support SMI will rise from 15.8% in 2020 to 22.1% in 2030 and 30.1% in 2094.

For now, the depletion date for Medicare remains unchanged, but according to CBO estimates, over two million Medicare patients will be admitted to a hospital because of the pandemic, with around one million of them being conventional Medicare beneficiaries under Medicare's inpatient prospective payment system. This would result in a $3 billion increase in Medicare spending in the 2020 and 2021 fiscal years.

In 2022, the Medicare "Part B" outpatient coverage premium is expected to rise by $10 per month, one of the highest increases over the past decade. This year's exact increase will not be announced until October.

The trustees noted in their 2021 report that "lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare" and that they "should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare."

"Medicare faces a difficult question going forward," explains David Bynon. "Will beneficiaries who have survived the pandemic be healthier overall, or will they suffer from new conditions such as long-COVID?" he asks. Bynon's Medicare think tank has been researching the US Medicare program and its many difficulties since 2012.

What Does The Future Have In Store For Us?

Social Security and Medicare are also under a lot of pressure because of the large number of baby boomers who are currently retiring combined with longer life expectancy.

Over 65 million Americans get Social Security benefits, including retirees, people with disabilities, and survivors of workers who have passed away.

Right now, more than 40% of the federal budget goes to these two programs that work together to keep the economy stable and provide a social safety net for families.

The trustees of Social Security and Medicare are the Secretaries of Treasury, Health and Human Services, and Labor, as well as the Social Security Commissioner. They are typically accompanied by two "public trustees," who are private citizens. Their goal is to serve as taxpayers' eyes and ears, but these positions have been empty since July 2015.

This year, we also don't have a Social Security Commissioner since Andrew Saul, a holdover from the Trump administration, was fired by President Joe Biden.

Social Security and Medicare are both on the verge of becoming unsustainable for future generations, so younger workers should not count on these two programs the same way previous generations did.

Now more than ever, Americans need to save and invest for retirement, as well as purchase proper insurance to cover long-term care and escalating hospital costs.

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