Will Social Security Catch the Flu?

March 11, 2020 7:12 AM , Updated March 21, 2020 5:14 AM
View this article online at https://www.fedsmith.com/2020/03/11/will-social-security-catch-flu/ and visit FedSmith.com to sign up for free news updates
Rising financial trend line on the left side in green with a coronavirus cell in the middle and a red financial line to the right trending downward

iStock.com

President Trump announced Monday that he is considering a payroll tax reduction to help American workers and boost the economy which has been hit hard by the Coronavirus outbreak.

While the announcement has drawn questions about the impact of this strategy on Social Security, they aren’t the right ones. We are speculating about the impact of lost payroll tax revenue, all of which would be backfilled from the general fund. Instead, we should be talking about how unplanned events – like this disease – affect the path Social Security takes to insolvency.

As I have written in the past, the biggest threat to Social Security isn’t demographics, nor is it the finances. The imminent threats to the program come from outside of the system. I am talking about unplanned events that disrupt the program’s financial health, derail the trustees’ projections, and shake the public’s confidence in the program’s future. 

At this point, the public broadly sees the trustees forecast as an absolute guarantee rather than a gruesome possibility. That is a terrible mistake, one that fosters a rather dangerous complacency about a program on which millions depend. 

Even policy experts and lawmakers share the unbridled optimism about the infallibility of the projections. Senator Sanders for example suggests that Social Security can pay every penny owed until 2035.  

In reality, the forecast is actually built on some fairly optimistic assumptions, which provide little room for the influences like an extended bear market in stocks, a weather phenomenon like global warming, or a healthcare scare that creates an economic slowdown. These estimates are only as good as the assumptions.  

Here are some more assumptions: 

  • The government can refinance $2.9 trillion plus interest in the public markets without disrupting the broader economy.
  • The program can have Medicare pass through insolvency without any impact on jobs or wages
  • Future retirees do not change their claiming patterns or spending habits as the insolvency of the program approaches.

Even so, there is no guarantee that Social Security can pay promised benefits for 15 years. In fact, the trustees of the program estimate that it is roughly a 50 percent chance of paying full benefits into 2035. In other words, it is a coin-flip, one that dictates the quality of life for millions. The forecast on which we depend isn’t what will happen; it is a warning about what might happen even with a cooperative economy.

The trouble is, of course, that the economy does not always cooperate. There will be real life, off-the-radar events that change the direction of the economy far removed from the trustees’ theoretical world. 

To illustrate, the Coronavirus has been blamed for the fall of the stock market. Rising equity markets tend to provide multiple buffers for Social Security. It is only natural that in times of a bull market people tend to worry less about the financing troubles of Social Security. 

Separately, the wealth effect created by stocks rising in value tends to get people to take more risk and spend more money. In the case of this disease, consumers may stay home to avoid contracting the disease. That would translate into fewer jobs and lower wage growth. 

At this point, the program seems to be benefiting from healthy payroll taxes, and a lower than expected COLA. It appears that revenue from the levy on wages may even be healthy enough to offset the lost revenue from falling interest rates. 

The Coronavirus may not have any impact on that path. The subject simply serves as an example of the type of things which the Trustees can’t control and which may determine how the Trust Fund reaches zero.

Keep in mind, panic isn’t the result of bad things happening; it is the result of unplanned things happening.

© 2020 Brenton Smith. All rights reserved. This article may not be reproduced without express written consent from Brenton Smith.

Tags:

About the Author

Brenton Smith (A.K.A. Joe The Economist) writes nationally on the issue of Social Security reform with work appearing in Forbes, FedSmith.com, MarketWatch, TheHill.com, and regional media like The Denver Post.

Top