How could the pandemic impact Social Security and Medicare benefits?
How could the pandemic impact Social Security and Medicare benefits?
By: Stacey Nickens
Traditionally, my retired clients have relied on some combination of Social Security benefits, retirement savings, and pension plans. However, Social Security has been on wobbly legs for awhile. The 2020 Social Security report showed that funds for the retirement and disability programs were set to run out in 2035. When these funds “run out,” the Social Security administration would only have enough funds to cover 79% of scheduled benefits.
This shortfall can be attributed to a variety of causes: the retirement of the large Baby Boomer generation, slow downs in the labor market, and longer life expectancies. Additionally, this report came out in April of 2020 and does not account for the pandemic’s potential impact on the Social Security trust funds. So how could the coronavirus pandemic impact funds for Social Security?
Lower payroll taxes could cause Social Security funds to deplete more quickly than anticipated. Social Security is primarily funded through a 12.4% payroll tax. However, with such high unemployment levels due to the pandemic, payroll tax revenue could decline significantly. Stephen Goss, Social Security’s chief actuary, noted that a 15% cut in employment earnings and payroll taxes during 2020 could accelerate Social Security’s depletion date to the middle of 2034. Goss also said that continued declines in payroll revenue in 2021 could lead to a depletion date in 2033. An unexpectedly long recess could even lead to Social Security funds being depleted in 2029, according to the BPC. Moreover, as people get laid off, many people are also losing employee-sponsored retirement plans. This shift will make Social Security benefits all the more crucial. We will have to see how the federal government responds to this need.
Medicare Part A could also be impacted by declining payroll taxes. The hospitalization component of Medicare similarly relies on COVID-impacted payroll taxes, and the program was already struggling before the pandemic. Before the coronavirus hit, Medicare Part A was estimated to be depleted in 2026, when the program would only be able to cover 90% of its expenses. We will have to wait for Social Security’s 2021 report to see how declining revenue from payroll taxes impacts this portion of Medicare.
Medicare Part B premiums could increase significantly for certain enrollees. The Part B premium for outpatient services equals 25% of the program’s total costs. Because many individuals may be deferring outpatient services until the pandemic calms down, we could see a surge in service needs in 2021. However, anyone who receives Social Security cannot have their Part B premium increase more than their Social Security cost-of-living increase. This rule will help reign in Part B premium increases for Social Security recipients. Other groups may experience a Part B premium increase, though, and these groups include:
- Those receiving Medicare but delaying claiming Social Security.
- Those who enroll in Medicare for the first time in 2021.
- Federal retirees who use the Civil Service Retirement System instead of Social Security.
- State government employees who receive a pension and are not covered by Social Security when employed by the state.
- Low-income seniors who receive Social Security, Medicare, and state-run Medicaid.
- Higher-income recipients already subject to IRMAA.
Part D premiums will likely not be impacted by the pandemic. Part D program costs may increase in 2020 as more individuals order larger supplies of medication to prepare for possible medication delays. However, this program cost increase would have come at some point regardless. The pandemic only caused expected costs to occur in a more concentrated time frame.
What changes might occur to prevent Social Security and Medicare funds from being depleted? It is unlikely that Congress would pass an across-the-board benefit cut of 20% or more. Instead, payroll taxes may increase. The full retirement age for Social Security may increase. Recipients may receive smaller cost-of-living adjustments, or higher income seniors may receive smaller benefits.
How can you prepare for benefit changes? Because we don’t know the way Congress will handle this issue, it’s challenging to prepare for any possible change. However, it’s helpful to see Social Security benefits as part of, but not the entirety of, your retirement plan. If your benefit or cost-of-living adjustment decreases, we can review all of your income sources. Doing so will allow us to find ways to compensate for this change. Perhaps we rebalance to increase your dividend income. Perhaps you adjust your retirement withdrawal strategy in order to keep your income under the IRMAA adjustment for Medicare Part B. You could also be proactive and cut spending on home improvement projects or vacations now, in order to ensure you can rely more heavily on retirement savings in the future. No matter what, if you’re concerned about your benefits, I encourage you to reach out. We can review your retirement plan. During this review, we can run through different scenarios to help you understand how you can stay on track towards achieving your financial goals. Retirement plans can always be flexible if you prepare in advance.
