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Social Security’s already-precarious financial condition will become worst because of the current economic downturn. The question many economists and policy analysts are trying to answer is: How bad will the system’s financial condition be?
The trustees of Social Security issued their latest annual report in April, but the report didn’t include the downturn. The trustees used only data through the end of 2019. Though the projections used by the trustees include economic fluctuations, they don’t include a severe downturn. For example, after the financial crisis, the trustees had to substantially revise their forecasts. They projected the Social Security trust fund would run out of money two years earlier than they previously forecast.
I reported in April that soon after the latest report from the trustees, the Center for Retirement Research (CRR) at Boston College conducted its own analysis. The CRR concluded that the Social Security trust fund would run out of money about two years earlier than estimated in the trustees’ report.
I argued the CRR estimate was too optimistic, because the recession was likely to be deeper and last longer than assumed in CRR’s report.
Recently, the Penn Wharton Business Model staff issued a study that makes several estimates of Social Security’s future using different economic assumptions.
Even if the economy makes a sharp V-shaped recovery, the Penn Wharton model says the trust fund will run out of money two years earlier than the trustees estimate.
A V-shaped recovery seems unlikely at this point. So, the study also estimated the results following a more gradual U-shaped recovery. Such a recovery would cause the trust fund to be depleted another two years earlier than under a V-shaped recovery. At this point, even a U-shaped recovery is optimistic, barring a scientific break through.
As I’ve said before, retirees and near-retirees shouldn’t panic at reports the trust fund will run out of money. It’s not a good idea to accelerate the date you claim Social Security benefits simply because the trust fund will run out of money.
Payroll taxes will continue to roll into the program each year. They are estimated to be sufficient to pay 75% to 80% of promised benefits for at least 75 years.
Also, it’s likely those already retired or within five to 10 years of retirement will have their benefits protected by Congress, except perhaps for high income Social Security recipients. Most of the burden of the Social Security shortfall will fall on those who are 10 years or more away from claiming their benefits. They need to incorporate higher taxes and lower benefits in their retirement plans.