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Economists are warning that the government needs to begin thinking seriously about the longer-term impacts of the coronavirus pandemic – including how it will negatively affect Social Security in a "significant" way.
A new analysis conducted by researchers at the Penn Wharton Budget Model showed that Social Security is at risk of running out of funds as many as four years earlier than anticipated – in 2032 – depending on the shape of the U.S. economic recovery. Prior to the pandemic, the group had a 2036 estimate for the OASDI trust fund.
“In the Social Security world, this really isn’t very long [off],” Penn Wharton Budget Model Faculty Director Kent Smetters told FOX Business. “Clearly people are focused on the here and now, but it’s time to start focusing on the longer-run trade-offs … we just lost four years [from Social Security].”
If the U.S. economy were to bounce back sharply – and the recovery resembled more of a “V” shape – then reserves would be depleted in 2034. Unfortunately, Smetters said this scenario is less likely than a more gradual “U-shaped” recovery, under which the PWBM forecasts the 2032 timeframe.
A good way for retirees to think about the problem is to consider their 401(k) savings – it is similar to being told account balances will lose 25 percent of their value in the near future, Smetters said.
A benefit reduction wouldn’t just affect future retirees, across-the-board cuts would apply to people currently collecting benefits, too.
A decline in payroll taxes is expected to be primarily responsible for draining Social Security’s coffers more quickly, given the dramatic rise in unemployment numbers.
As of last week, more than 38 million Americans had filed jobless claims.
Unemployment benefits are not subject to payroll taxes, which fund Social Security and Medicare. Employers and employees each pay 6.2 percent for Social Security and 1.45 percent for Medicare, and an additional 0.9 percent is levied on the highest earners.
Low interest rates also affect reserves, as they reduce income on bonds held by the fund.
Smetters noted the timeline could even be more accelerated than either PWBM forecast suggests – if the recovery takes an “L-shape,” as it did in the wake of the 2008 financial crisis.
The annual trustees’ report, which was released last month, did not take the effects of coronavirus into account when it estimated that the program’s reserves would be depleted by 2035. At that time, continuing tax income was expected to be sufficient to cover 79 percent of scheduled benefits.
A separate analysis, which did take into account the effect of the pandemic, estimated that Social Security’s funding may run dry as soon as 2029.
As of March, more than 69.4 million people were receiving Social Security, Supplemental Security Income or both. The average benefit was $1,387.26.