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At the end of April, the government projected that Social Security, one of the biggest federal benefit programs, would be unable to pay full benefits starting in 2035. At that point, only 76 percent of benefits could be paid out. But that was before officials accounted for the virus outbreak, which they agree will deal a substantial blow to the program.
When factoring the crisis, the Bipartisan Policy Institute estimated that the depletion date would jump from 2035 to 2029.
The bulk of the money that Social Security pays out in retirement and disability benefits stems from payroll taxes; the program receives some additional funding from the taxation of benefits and interest earned on securities held by the trust fund.
“All three revenue sources are threatened by the current recession,” the Washington-based think tank wrote.
Over the past two months, the U.S. economy came to a near standstill to slow the spread of the virus, pushing the jobless rate to 14.7 percent, the highest level since the Great Depression. Some economists, including Federal Reserve Chairman Jerome Powell, have suggested it could climb as high as 25 percent. More than 36 million Americans are suddenly out of work and no longer paying into the retirement fund.
All employees and employers each pay a 6.2 percent payroll tax on wages capped at $132,900. Right now, an employee earning $50,000 per year would pay $3,100 in a payroll tax. President Trump is also pushing for a payroll tax cut in the next coronavirus relief package, although Democrats and Republicans have worried it would damage the social safety net and do little for the millions of individuals no longer receiving a paycheck.
At the same time, a wave of older workers who are forced to retire earlier than they’d planned pre-crisis is expected to start claiming benefits, raising costs in the short term for the fund. During the 2008 financial crisis, for instance, the number of eligible adults claiming benefits six months early increased by 5 percent. The Obama administration estimated the recession put the fund on the path to be exhausted by 2037, four years earlier than initially expected.
Individuals who choose to collect early can claim benefits as early as 62, but they receive 5 percent to 6.6 percent less each year, depending on when they begin drawing payments. Conversely, those who decide to wait until their full retirement age receive a credit of 8 percent each year up to age 70.
In 2019, 54.1 million people received Social Security benefits. About 40 percent of Americans over the age of 60 who are no longer working full-time rely solely on Social Security benefits for their income, according to the National Institute on Retirement Security. The annual benefit is about $17,000.
“For years, the trustees have warned that policymakers need to act to avoid depletion of reserves in Social Security’s trust fund,” the report said. “But now that moment will arrive sooner than anyone expected.”