The economic downturn that resulted from the pandemic has become so severe that it is expected to spike the long-anticipated depletion date of the Social Security Trust Fund for retirement benefits. The Social Security Trust Fund for retirement which was expected to deplete in 2035 is now reckoned to deplete somewhere between 2033 to 2029.
The non-partisan Congressional Budget Office reported that the Old-Age and Survivors Insurance Trust Fund will accumulate deficits of $100 billion by next year and the fund will be wiped out by 2031. Earlier this year, before the pandemic struck the U.S, the Social Security trustees had predicted the insolvency cuts to appear by 2035.
It is expected that the stimulus package of $3 trillion which is acting as a barrier against the insolvency of Social Security benefits will also run out sooner.
Since the Great Depression, the payroll tax cut is the worst the nation has ever seen. With more and more people losing their jobs and businesses shutting down, there will be lesser money going into the Social Security Trust Fund as lesser people pay payroll taxes.
In the absence of a legislative fix, the reduction in funds will simply cut the benefits of some retirees by 20-25%. So, “the retirees would receive around 25% fewer benefits when they will turn 73 in 2031”, as per the bipartisan deficit hawk group statement. Additionally, the Social Security disability expenditure will fall by 11% when the trust fund depletes in 2026.
“The federal spending will offshoot to 32% to ramp up the U.S gross domestic product” which according to the new CBO estimates, “is the highest percentage since World War II”.
The Committee for a Responsible Budget’s analysis says that all the major trust funds will face depletion in the coming 11 years. The crisis is only going to get worse due to the structural discrepancies of Highway, Medicare, and Social Security Programs.
A bipartisan group has predicted that the insolvency of Social Security will be reached by 2028. The projected depletion dates are driven by declining tax revenue, lower interest rates, rising disability claims, and early retirements.
The CBO’s latest figures suggest that “Continuing course of high spending and unnecessary borrowing is not only unsustainable but is also worsening the present economic pain.”
Although experts agree that increasing federal spending for pandemic relief is the need of the hour, they also recommend the policymakers to act accordingly in the aftermath to protect Social Security from insolvency, which will contract benefits for future retirees.
The experts are proposing two popular ideas to budget appropriately when the funds will be depleting; the idea of high-taxation and reduction in benefits or a combination of both. Some other popular ideas that are revolving among critics are; increasing the retirement age and higher payroll taxes for high-income earners.
President Trump aims to protect Social Security funds but on the contrary, is also in favor of giving workers higher payroll by eliminating the payroll taxes, while payroll tax is the major source of funding for Social Security in the current scenario. Former Vice President Joe Biden has called for applying the tax on wage above $400,000, in addition to the current tax on the first $137,700.
Doesn’t it make sense to have a strategic Retirement Tax Planning now no matter what the economy does and who gets elected???