The Congressional Budget Office has released its September 2020 outlook report for major federal trust funds, factoring unemployment data since the beginning of the Coronavirus pandemic.56523-Trust-Funds
Social Security has long been on the path toward financial exhaustion. In the past, far more money was collected via payroll taxes than needed to pay immediate benefits. This was an intentional move to build a surplus reserve ahead of the Baby Boomers’ mass retirement. It’s because of this surplus that we’ve been able to pay full scheduled benefits for such a large generation of retirees.
But now—and for many years—Social Security has been running a deficit. Workers are not contributing enough through payroll taxes to completely fund current retirees’ benefits.
The Social Security Trustees have long estimated that with no legislative intervention, reserve funds would be depleted by 2034, resulting in mandatory benefit cuts of up to 25%.
However, previous reports from the Social Security Trustees did NOT include economic effects from the pandemic recession. Their most recent report maintained 2034 as the exhaustion date. But many Social Security advocates and economic experts speculated the reality of Social Security’s long-term projections was much worse.
In releasing last week’s report, the CBO has confirmed this reality to be true. And while its conclusion is alarming, it comes as absolutely no surprise.
Since March of this year, the entire country has been hard-hit by COVID-19. Between February and May, unemployment skyrocketed to rates that surpassed the entire two years of the Great Recession of 2008.
This year’s unemployment rates can be more closely compared to those of the Great Depression. And though—thankfully—we are far from the worst of the Depression, the pandemic has caused the second worst unemployment event in our history.
With mass unemployment comes a stark drop in payroll tax contributions, both from employees and employers. That means even less money coming in to pay immediate benefits than before.
The report also confirms predictions about a sharp increase in beneficiaries. When unemployment spikes, we can also expect to see a spike in Americans filing for unemployment benefits and early retirement benefits to make ends meet. The CBO’s report notes that we are indeed seeing that uptick in claims.
With the combination of declining contributions and increasing demand for benefits, the CBO now estimates the Trust Funds will reach depletion by 2031, three years earlier than previously projected and less than 11 years from now.