On Friday, the Wall Street Journal published a piece (“Social Security weathered Covid-19 better than expected”) that the near-term finances of federal government’s retirement and disability programs have defied the doomsday predictions issued by policy experts about the challenges created by the economic fall-out of the pandemic.
Honestly we don’t know, and won’t until the 2021 Trustees Report is available to see how the pandemic affected things like average wages, inflation, fertility and actual payroll tax collections for 2020.
Over the past year, the Social Security Administration has not released much in the way of guidance on the impact of the pandemic on the system. The Trustees of the program produced the 2020 Trustees Report without considering the impact of COVID. Since that time, the Social Security Administration provided new assumptions which imply that the venerable program would lose a year of solvency.
In other words, people celebrating a 74th birthday today have a better chance than not of outliving the system’s ability to pay full benefits. Mind you, this isn’t a doomsday estimate. It is the outlook for a relatively rapidly growing economy.
This month the Social Security Administration is expected to release on schedule the actual payroll tax figures for 2020. Up to now, the program has been operating on cash that is credited to the Trust Funds based on the President’s Fiscal Year 2021 Budget. Until the end of this month, Social Security thinks that 2020 was a record year for revenue ($1 trillion in payroll tax).
Once we know the actual payroll tax collection, the system will generate an adjustment to compensate the Treasury for what most experts believe was an overpayment. Initially, the SSA thought this adjustment would be in the range of $150B for payroll taxes alone. They have backed off that figure ever since, and now believe that the adjustment will be considerably less than $100 billion. I continue to think that 130B is about right – which I will explain in the comment section. We will see.
This is the one year impact of COVID in the most narrow sense of the word. COVID affected more than just the number of workers, and size of paychecks.
Interest rates are down. While you may think the Trust Fund is a collection of worthless IOUs, the fact is the Trustees who gauge the system’s future think that they will generate nearly 750 billion in revenue over the next 10 years.
Inflation is up, and that immediately drives costs higher. I tend to call inflation programmatic cancer because CPI is a direct driver of cost via the COLA. If you think inflation is a one-year problem, the system lost roughly 50 years of projected solvency over the space of 5 years as a result of high inflation and sluggish wage growth.
Fertility is down. While the number of babies today does not change the near-term solvency picture of the system, it means that the discounts forced on the system by Congressional inaction will grow. (see the analysis of Brookings Institute)
Average wages will fall for only the second time in 50 years. This isn’t an issue that Congress can ignore. The benefit checks of people born in 1960 and 1961 face sharp reductions that last a lifetime. Moreover, the average wage index controls the cap on taxable wages.
Despite the recovery, the work force is down by 8 million, see BLS release.
The point of the column isn’t to suggest that the Trustees will get the assumptions right. As you have seen here before, we really don’t know. Unless you look at the broader picture of the system, telling people that the program has weathered the storm is premature.
I am not sure anyone would call it a storm. In the past Presidential election, the campaign cycle included more than 12 debates, not one of which generated a question about Social Security. Systemic complacency rules the day.