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Might Social Security be one of the unexpected casualties of the coronavirus?
That impact of the pandemic on Social Security didn’t received much attention in the dark days of March, as the world focused on the more immediate devastation wrought by the virus. Now that the dust has settled, at least for the moment—with the S&P 500 SPX, +0.05% more than 20% higher than its March low and with many states and countries making tentative plans to start reopening their economies—some of us are beginning to consider some of the pandemic’s longer-term consequences.
And that’s why Social Security’s solvency is back on retirees’ radar screens. There were numerous MarketWatch columns devoted to various nightmare scenarios involving coronavirus’ impact on Social Security.
I take exception to their fear mongering. While the coronavirus’ impact on Social Security certainly is cause for concern, that impact should not be exaggerated. In a ranking of things for retirees and soon-to-be retirees to worry about right now, Social Security is well down the list.
Interestingly, many of the reasons given for a nightmare Social Security scenario have nothing to do with the coronavirus. One column bemoaned the declining birthrate in the U.S. and the aging of the population, for example. But these trends are hardly new. The Social Security’s actuaries have long taken these demographic trends into account in calculating the solvency of the Social Security trust fund (specifically, the Old-Age and Survivors Insurance (OASI) Trust Fund, out of which all retiree benefits are paid).
In fact, as I pointed out in a column last summer, Social Security’s actuaries as long ago as the mid-1980s were projecting that the mid-2030s would be when the OASI trust fund would begin to be unable to meet all its obligations. That remains the projection today.
Might the coronavirus lead to an acceleration of that date when the OASI’s finances will need to be bolstered? The official answer is that it’s too early to tell. In a recent email, the press secretary for Stephen Goss, the chief actuary of the Social Security Administration, wrote that “We have not as yet developed projections for the implications [of the coronavirus] over the coming decades. The degree and duration of the pandemic are not yet fully clear over this time horizon.”
Even if the virus does lead to a couple-year acceleration of that date, however, it doesn’t alter the fundamental reality that at some point in our retirements Congress will have to modify the Social Security benefit system to either increase revenues coming into OASI or reducing benefits, or both. My retirement security doesn’t change much upon discovering that Congress must act by, say, 2033 as opposed to 2035.
In the meantime, let’s discuss the various ways in which the coronavirus might impact the OASI’s solvency:
Reduced income
Without a doubt, the massive increase in unemployment will reduce the amount of FICA taxes paid into the OASI trust fund this year. But the longer-term impact is far less clear. Consider the economic projection recently made by Vincent Deluard, Global Macro Strategist at INTL FCStone. He was hardly being optimistic, as he used the projection to justify an S&P 500 level some 35% lower than where it stands today. But he assumed that after taking a big hit this year, the economy would come back strongly as the pandemic passed, and by the end of 2021 would be back to its pre-COVID19 trend line.
To the extent employment grows more quickly than it otherwise would have when the economy comes back on line, the OASI trust fund could eventually recover some of the shortfall it experiences this year.
And it’s important to note in this regard that the actuarial projections of when the OASI would run out of money do not assume the U.S. economy will never experience a recession. While the economic impact of the coronavirus will be extraordinary, it would have a long-term negative effect on the OASI only to the extent its net impact is worse than already factored into the actuarial projections.
Finally, it’s also worth bearing in mind that the formula Social Security uses when calculating a person’s benefits is based on the 35 of his years in which he earned the most. An increase in unemployment, while terrible in its impact on the unemployed, may therefore lead that formula to calculate a reduction in the benefits that the OASI otherwise would have to pay.
My point in mentioning these various factors is to illustrate how complex it is to calculate the net long-term impact of the coronavirus.
An increase in the number of retirees receiving Social Security at age 62
Similarly, we shouldn’t exaggerate the impact of soon-to-be retirees deciding to start receiving their Social Security benefits at an earlier age. That’s because the level of Social Security benefits you’re eligible to receive at age 62 is lower than you’d get by waiting until age 66 or age 70.
Social Security’s statisticians have calculated those levels to be actuarially equivalent, so the expected lifetime draw on the OASI trust fund is the same for someone who starts receiving benefits at age 62 versus if he had waited until he was 66 or 70. Social Security’s long-term financial health should be unaffected by an increase in the number of people deciding to receive their benefits at age 62.
The bottom line
For these and other reasons, our trying to assess the long-term impact of the coronavirus is little more than armchair speculation. As Andy Landis put it to me in an email: “The size of the hit [on Social Security] could be a blip or a bomb crater.” Landis, of course, is the former Social Security Administration representative to whom I regularly turn for insight into all things having to do with Social Security. He is author of “Social Security: The Inside Story.”
The bottom line? If we want something to worry about, there are many others to choose from that are far less speculative—such as the very real suffering and loss that people are experiencing right now.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. Hulbert can be reached at mark@hulbertratings.com.
