Recession could hit Social Security financial outlook

The likelihood that people will file for benefits sooner amid a downturn and the possible decline in payroll tax revenue could put pressure on the Social Security trust fund

During recessions, people tend to claim Social Security retirement or disability benefits sooner than they would otherwise because they can’t afford to delay. In addition, high unemployment caused by the economic fallout from the worldwide coronavirus pandemic would reduce the payroll tax revenue that funds Social Security.

Coupled with President Donald Trump’s proposed tax holiday to temporarily eliminate payroll taxes for employers and employees, a spike in early Social Security claims and a reduction in payroll tax collections could seriously weaken the long-term financial outlook for the Social Security trust fund, a seniors’ advocacy group warned Tuesday.

“Although many older adults today are putting off claiming benefits to allow their Social Security payouts to grow, they are unlikely to be able to afford to wait if they lose their jobs or when the value of their retirement account investments are significantly impacted,” said Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizen League.

During the Great Recession, which lasted from December 2007 to June 2009, unemployment peaked in October 2009 and remained high through at least the first half of 2013. The share of eligible men who started collecting their Social Security retirement benefits early increased in 2009 as the unemployment rate for older men surged, according to a 2013 report published by the Urban Institute entitled “How Did the Great Recession Affect Social Security Claiming?”

However, the growth in early claiming trends was modest and didn’t last, the report noted. Early claims for retirement benefits fell in 2010 and 2011 as men again delayed retirement, resuming a steady decline in men’s early claiming patterns. That trend began in 2000 in response to changes in Social Security rules that eliminated earnings restrictions for individuals once they reached full retirement age. Prior to 2000, earnings restrictions applied up to age 70.

“Providing a complete payroll tax break to stimulate the economy would only exacerbate financing issues and would be unlikely to make a big enough emergency impact when needed, especially for people who aren’t working,” Johnson said. “Congress needs to ensure that any big emergency financial stimulus to address a coronavirus-caused economic recession doesn’t put Social Security and Medicare benefits at risk as well.”

Trump has proposed eliminating payroll taxes that fund Social Security and Medicare beginning through the end of the year. The Institute on Taxation and Economic Policy, a nonpartisan think tank, estimates the proposed payroll tax holiday would cost $843 billion and 65% of its benefits would go to the richest 20% of taxpayers.

In 2020, employers and employees each pay 7.65% of the first $137,700 of wages to fund Social Security and Medicare. Self-employed individuals pay both the employer and employee portion, for a combined tax rate of 15.3%.

The Social Security portion is 6.20% on earnings up to the applicable taxable maximum amount. The Medicare portion is 1.45% on all earnings, even those above the maximum wage base.

Employees would benefit directly from eliminating their share of the Social Security and Medicare taxes, the ITEP analysis said, but the benefits would not do a good job of targeting those who need help the most. Eliminating the employer side of these taxes would provide a windfall to corporations and other businesses, the report added.

Congress is working on an economic stimulus package that includes a compromise plan to target payroll tax relief to small businesses.

In the meantime, an InvestmentNews reader asked a timely question about what would happen if a client, who works part-time and collects Social Security, files for unemployment benefits. “Does unemployment income count against the Social Security earnings test?” he asked.

The short answer is no.

In 2020, individuals who claim Social Security before their full retirement age and continue to work would lose $1 in benefits for every $2 earned over $18,240. Individuals who turn 66 this year can earn up to $48,600 in the months before their birthday and would only forfeit $1 in benefits for every $3 they earned over that limit. The earnings restrictions disappear at full retirement age, meaning people can earn any amount of income without jeopardizing any benefits.

“If a client made $16,000 this year to date and then files for unemployment and receives, hypothetically, $4,000 in benefits, does that $4,000 in unemployment income push him over the Social Security wage limit and subject him to repaying some of his Social Security?” the adviser asked via email.

No. Social Security only counts “earned” income, which is defined as wages if you work for someone else or net earnings if you are self-employed. It does not count other government benefits — including unemployment benefits — investment earnings, interest, pensions, annuities or capital gains.