For half of married couples and 70% of unmarried people, social security benefits provide at least half of household income. And these benefits represent 90% or more of the funds available for 21% of married couples and 45% of singles. Unfortunately, this essential source of income could be affected by the coronavirus in two main ways.
1. Coronavirus Could Lower Cost of Living
Retirees generally see their benefits increase by a small percentage in most years, due to higher prices. The increase is called a cost of living adjustment (COLA) and is calculated based on changes to a consumer price index called the Consumer Price Index for Urban and Office Workers (CPI) -W).
However, the elderly do not receive COLA every year and in some years they get very small ones. This can happen when CPI-W does not show a price increase. In 2009, 2010 and 2015, deflation resulted in lower prices, so there was no COLA (fortunately, the benefits do not diminish in these situations – they just stay the same). And in 2016, year-over-year price increases were so slight that seniors saw only a 0.3% adjustment to their benefits.
Thanks to the coronavirus, it is very likely that for social security recipients, history will probably repeat itself and retirees will either see a small adjustment in the cost of living next year, or no COLA at all. In fact, initial data from the Bureau of Labor Statistics suggests that this much-anticipated increase could be half the amount from last year and total only 0.8%.
With average social security benefits amounting to only $ 1,503 per month in 2020, every little detail counts – and many experts believe the CPI-W is not the best measure of inflation for spending by seniors. If a small increase accelerates the loss of purchasing power experienced by beneficiaries, seniors may end up with money next year. And since all future increases are based on a percentage of benefits, a small increase in one year has a ripple effect that will be felt for years to come.
2. It could also lead to reductions in benefits sooner than expected
Most retirees probably know that social security is in financial trouble. The program has a trust fund that helps cover benefits, and projections have long shown that the fund will soon run out.
While the latest report from social security administrators revealed that the combined trust funds for social security pension and disability funds would be empty in 2035, the coronavirus pandemic will likely accelerate its depletion. In fact, as fewer payroll taxes are collected, research from the Bipartisan Policy Center has revealed that the fund could dry up by 2028.
If the trust fund is short of money, social security will only be able to pay benefits out of the income it earns from payroll taxes and taxes on the benefits of high-paid workers. This is enough to pay about 76% of the promised retirement benefits. Unfortunately, this would leave retirees looking for a 24% cut in benefits if legislators took no steps to increase funding for the program.
With so much political turmoil going on right now, it is very unlikely that Congress will want to add a fight against social security funding to its list of tasks – particularly with the holding of elections. But the longer legislators wait to act, the more difficult it is to close the funding gap. Unfortunately, the political difficulties associated with finding a solution mean that current and future beneficiaries must resign themselves to a reduction in benefits that occurs sooner than later due to COVID-19.
Be prepared for the impact of the coronavirus on social security
Whether you are receiving social security benefits now or depend on them in the future, the damage that COVID-19 could do to your finances should be cause for concern.
If you’re still working now, increasing your investment in retirement is a good idea to make sure you have an egg large enough to provide enough income to supplement social security. And if you’re already retired, watch out for any reductions in your purchasing power or benefits, so you can adjust your budget accordingly and continue living within your means.
Planning for a future in which social security benefits are a little smaller may not seem like fun, but it is worth doing so so that you are not caught off guard and suffer more serious financial damage because of that.