Coronavirus could wipe out Social Security COLA for 2021
Benefits have lost about 30% of their purchasing power over the last two decades
Financial expert Chris Hogan discusses how to manage finances and retirement savings amid the coronavirus pandemic.
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Negative economic fallout related to the coronavirus pandemic is already expected to put pressure on the solvency of the Social Security trust fund, but it could also hit beneficiaries’ checks in 2021.
Recipients look forward to a possible benefit increase each year, known as a cost of living adjustment (COLA). That increase, however, is tied to inflation – which has been depressed by the pandemic.
Based on the consumer price index data through April, which measures inflation, the Senior Citizens League estimates the cost of living adjustment for 2021 will be 0.
The COLA for 2020 was 1.6 percent.
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While the virus and related lockdown measures have affected both supply and demand, social distancing and shelter-in-place orders suggest the effects on demand will be worse, the Federal Reserve Bank of San Francisco said, resulting in downward pressure on prices.
The estimate for 2021 could change considering there are a couple of months remaining before the Social Security Administration announces the COLA in October.
The average monthly benefit among all retired workers increased to about $1,503 per month this year.
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On the bright side, while the advocacy group has been warning that the buying power of Social Security benefits has been eroding over time, the most recent report found a 3-percentage-point gain in the buying power of benefits in 2020 when compared with 2019.
“That should indicate that most retirees may have seen at least some prices come down on certain items — such as lower electric bills, as well as lower prices on eggs, fresh fruits, and vegetables,” Mary Johnson, a Social Security policy analyst for the League, said in a statement.
Still, benefits have lost about 30 percent of their purchasing power over the last two decades.
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In the meantime, the pandemic is also putting funding for the overall program at risk.
The most recent trustees’ report, which did not account for the effects of the pandemic, forecast that reserve funds would be depleted in 2035. At that time, continuing tax income will be sufficient to cover 79 percent of scheduled benefits.
But a new report from the Bipartisan Policy Center, which analyzed the impact of coronavirus on the program’s finances, estimated reserves for both the old-age and disability insurance programs would run dry in 2029.
Since many businesses around the country have been forced to close – and more than 36 million Americans have lost their jobs – payroll tax revenue has declined. Unemployment benefits are not subject to the payroll tax.
That’s an issue because payroll taxes fund Social Security and Medicare. Employers and employees each pay 6.2 percent for Social Security and 1.45 percent for Medicare, and an additional 0.9 percent is levied on the highest earners.
There are also discussions about reducing or temporarily eliminating the payroll tax to alleviate coronavirus-related financial pressures.
Putting further strain on the program is the Federal Reserve’s decision to cut interest rates to nearly 0 percent, which means the yields on bonds held in the Social Security trust fund will also be lower.
On the flip side, an economic downturn will increase the number of people claiming Social Security Disability Insurance.
As of March, more than 69.4 million people were receiving Social Security, Supplemental Security Income or both. The average benefit was $1,387.26.
Combined, Social Security and Medicare accounted for about 41 percent of the federal budget in fiscal 2019.