What You Need to Know about Social Security in a Pandemic and Recession

Social Security benefits play an important role in retirement security, and they are being impacted by current events in several ways.

Social Security cards next to a table of numbers.
(Image credit: Getty Images)

The three-legged stool of retirement planning is the idea that Social Security, your personal savings and a pension or employer-sponsored 401(k) should work together to give you a stable retirement. However, none of these is expected to work on its own. Social Security is only designed to replace about 40% of your income. The average benefit in 2020 is about $18,000 a year, which isn’t enough for most retirees to make ends meet.

This is why you cannot rely on Social Security alone to get you through your golden years, and it’s important to come up with a strategy on when to take your benefits before you retire. A claiming strategy is especially important for those in their 60s right now as current events may impact benefits.

How the Pandemic and Recession Are Affecting Social Security Benefits

We’re only a few months into our current recession, but it’s already impacting Social Security benefits; new numbers show benefits for those who turn 60 this year will be permanently reduced by about 9%. About 3 million people will turn 60 in 2020, and if you’re an average earner who will wait to claim Social Security until full retirement age, your benefits will be reduced by about $2,500 a year.

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Even prior to the COVID-19 pandemic and recession, Social Security was facing a funding shortfall. The government program is expected to begin tapping into its trust funds this year, and benefits are projected to be reduced starting in 2035. However, our current economic instability has some predicting that Social Security’s trust funds could run out as soon as 2032 or 2028 (opens in new tab). That’s because record unemployment means payroll taxes are down, and that’s a big source of Social Security’s funding.

The Impact of the Election on Social Security’s Future

Speaking of payroll taxes, President Trump has said he wants to eliminate payroll taxes if he wins a second term in the White House. At the same time, he signed an executive order deferring payroll taxes starting Sept. 1 through the end of the year. That’s a problem for Social Security, because 89% of its funding comes from payroll taxes (opens in new tab).

On the other hand, Democratic nominee Joe Biden says he plans to expand Social Security by increasing benefit payments if he wins the election. To do so, he wants more income from high earners to be subject to payroll taxes. In 2020, wages above $137,700 are not subject to the payroll tax. Biden’s plan calls for earnings over $400,000 to be subject to the tax.

No matter who wins in November, the upcoming election will likely impact Social Security’s future in some way. Lawmakers will be tapped to find a solution to the program’s funding shortfall sooner than later. While one option is to increase the payroll tax rate, another option is to raise the full retirement age once again. This was done in the early 1980s, boosting the full retirement age to a peak of 67 for those born in 1960 and later, which may encourage more retirees to wait longer to claim benefits.

The Impact of Inflation on Social Security Payments

Social Security recipients eagerly await an announcement on the COLA, or cost of living adjustment, each October. This year's COLA announcement was on Oct. 13, and it was just about what was expected: Social Security benefits will increase by 1.3% in 2021, the smallest increase since 2017. Because inflation had fluctuated so much in 2020, many had wondered whether Social Security checks would get a boost at all. As it is, this increase will raise the average monthly benefit check (opens in new tab) for 2021 by just $20 to $1,543.

The government program will be around in some form in the future, but we don’t know exactly what that looks like. This is why Social Security is part of the plans financial advisers like me create, but you cannot and should not rely on it for a majority of your retirement income. Your retirement security rests on how much you save during your working years and the plan you create for your nest egg.

Meet with a financial adviser when you are five to 10 years away from retirement to create a comprehensive income plan. An adviser will walk you through each step of the planning process to ensure you understand all the moving parts. Education is key to retiring with confidence.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Tony Drake, CFP®, Investment Advisor Representative
Founder & CEO, Drake and Associates

Tony Drake is a CERTIFIED FINANCIAL PLANNER™and the founder and CEO of Drake & Associates (opens in new tab) in Waukesha, Wis. Tony is an Investment Adviser Representative and has helped clients prepare for retirement for more than a decade. He hosts The Retirement Ready Radio Show on WTMJ Radio each week and is featured regularly on TV stations in Milwaukee. Tony is passionate about building strong relationships with his clients so he can help them build a strong plan for their retirement.