The Coronavirus pandemic could affect Social Security in several ways, including a short-term impact on inflation adjustments and a long-term worsening of the program’s finances, according to a report by the Center for Retirement Research.
The report noted that the slowing of the economy resulting from the pandemic could mean that no COLA will be paid in January 2021 on Social Security benefits; that also would mean no increase for federal or military retirement benefits and in a range of other federal programs that are inflation-indexed.
That COLA will be determined by the inflation count through September and already is minus 0.7 percentage points through the April figures, with the May figure expected to drive it even lower. That could make 2021 the fourth year in the last dozen with no COLA, a situation in which benefits are frozen but not reduced.
“The absence of a COLA should not harm Social Security beneficiaries, since in theory the cost of goods they purchase also have not increased in price – although substantial debate surrounds the appropriate index for retirees,” it said.
That also could trigger an anomaly involving Medicare Part B premiums that in those prior years caused certain retirees to have to pay higher premiums because of a “hold harmless” provision that shifts more of the total cost of Medicare onto certain enrollees when no Social Security COLA is paid. Those categories include persons who are not eligible for Social Security benefits, which is the case for many federal employees who retired under the CSRS system.
Further, the spike in unemployment will reduce the money flowing into the Social Security trust fund, it said, at a time when the program already is about to start drawing down the fund. While outlays have exceeded payroll tax income for several years, interest credited to the fund has prevented the need to draw down the fund itself, up to now.
The report noted that under current projections, the fund will be drawn down in 2035, at which point there will be enough income to cover only about 80 percent of benefits. That would trigger benefit cuts, higher payroll taxes, direct payments from general revenues or some combination.
“If the COVID-19 economic collapse causes payroll taxes to drop by, say, 20 percent for two years, the depletion date would move up by about two years,” it said.
It added: “Thus, COVID-19 highlights, but does not change, the basic message: As soon as we get the immediate issue of the pandemic off our plate, it would be a good idea to take steps to ensure that people retiring in the mid-2030s and later do not see a 20-25-percent cut in benefits.”