2020 Social Security Financial Update

By Mitchell J. Smilowitz, CPA

The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds finds that the near-term outlook for Social Security has changed little in the last year. The Trustees estimate that Social Security’s combined Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust fund reserves will be depleted in 2035 – the same year predicted in last year’s report.

This assessment does not reflect the effects of the COVID-19 pandemic on the program’s funds.

Most of Social Security’s benefits are funded by the payroll taxes collected from today’s workers. Over the past three decades, the program has also accumulated nearly $2.9 trillion in the OASI trust fund. During that period, Social Security collected more in payroll taxes than it distributed in benefits. The surplus was invested in interest-bearing Treasury securities.

Currently, Social Security pays out more in retirement benefits than it collects in taxes. Over the next 15 years, the OASI and DI trust fund reserves will be used to make up the difference between the amount collected in payroll taxes and the amount paid out in benefits.

Unless political leaders act to shore up the program, after 2035, Social Security will only be able to pay about 79% of scheduled benefits using income from the payroll tax.

The Disability Insurance program is in a much better financial position. The Trustees estimate that the reserves will last through 2065. This is 13 years longer than reported in the 2019 report. The estimate reflects a decline in applications to the Disability Insurance program and the total number of disability beneficiaries.

The fundamental challenge to Social Security is demographic. The share of the population age 65+ will climb steeply over the next 20 years, from about 17% today to about 21% in 2040. This means that there will be fewer workers paying into the system for each beneficiary. In 1955, nearly nine people paid into the system for each person receiving Social Security benefits. In 2020, there were fewer than three people paying into the system for each beneficiary. By 2035, Social Security demographers project that only 2.3 people will pay into the system for each beneficiary.

The Pandemic’s Impact

Next year’s Social Security Trustees Report may look very different. The recession triggered by the coronavirus pandemic is expected to depress payroll tax income significantly. Until the economy recovers, Social Security income from payroll taxes is likely to be less than projected.

In addition to reduced payroll taxes, other factors are likely to increase the pressure on Social Security’s finances. The pandemic is causing some workers to retire early. Others may seek disability benefits if they are impaired after recovering from the virus.

While it is not possible to know the extent of the impact, the pandemic is sure to hasten the projected depletion dates for the Social Security trust funds.

Social Security Needs Shoring Up

Even if the trust fund reserves are depleted, the report estimates that income from payroll taxes will be sufficient to pay 79% of scheduled benefits in 2035. To maintain full benefits will require Congressional action.

Experts have suggested several possible fixes for the program.

  • Raise the maximum amount of wages subject to the payroll tax. Americans currently pay Social Security taxes only on the first $137,700 earned annually (increasing to $142,800 in 2021).
  • Raise the payroll tax rate from the current 6.2%.
  • Increase the minimum retirement age and full retirement age.
  • Reduce benefits.

Social Security provides a major source of income for most retired Americans. In the year prior to the pandemic, Social Security’s finances remained stable. The program has the finances to pay full retirement benefits for 15 years; the disability program has resources to last until 2065. Even after the trust fund reserves are exhausted, benefits will continue to be paid at a reduced rate from income generated through payroll taxes. Congress has several options for correcting the Social Security funding formula.

The JRB will continue to monitor the future of Social Security and inform you about the status of the program. We are available to work with you on how to plan your retirement income using various projections of Social Security benefits. Please contact us via email or call 888-JRB-FREE (572-3733) for a consultation.


October 2020