The economic fallout from COVID-19 has been unprecedented. With tens of millions newly unemployed, and with the U.S. GDP contracting at a record rate in Q2 2020, the financial peril of Social Security is becoming more evident.
Social Security was facing a major shortfall long before COVID-19, but the pandemic has accelerated the trend. A 2020 trustees report concluded that the cost of Social Security will exceed income beginning in 2021.
As Baby Boomers exit the workforce, the number of Social Security beneficiaries grows significantly. They are being replaced by lower birth rate generations in the Gen-X and Millennial categories. For Social Security, that means net inflows will turn negative as the ratio of workers paying taxes to beneficiaries receiving payments declines.
Even when the effect of the Baby Boomer exodus stabilizes after 2040, the annual costs of Social Security will continue to rise faster than income, according to the trustees’ report.
Reserves are drying up across the board. The Old-Age and Survivors Insurance Trust Fund (OASI), which distributes retirement payments, will be unable to meet its full obligations by 2034. Without new legislation, OASI will have enough tax income to distribute only 76% of scheduled payments.
Meanwhile, the Disability Insurance Fund will have enough money to cover 92% of its scheduled benefits. Its reserves are expected to be depleted in 2065, the report claims.
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