Like many aspects of today’s fiscal environment, trends that were worrisome before the pandemic have been accelerated by the unprecedented nature of today’s crisis. This is true of Social Security, the looming funding imbalance of which has the potential to be exacerbated by an increased number of claimants and a decrease in revenues due to depressed economic activity.
The uncertain economic environment makes the debate over how to save Social Security that much more important. Trade-offs must be made, but the acute contraction of the employment landscape dictates that so-called solutions that harm employment will serve to undermine the nation’s economic recovery as well as the lasting health of Social Security.
With millions of people out of work and the infection rate remaining unsteady, it is obvious that the pandemic still requires a deliberate, targeted, and hopefully temporary response from lawmakers. Legislation that addresses Social Security’s funding shortfalls with permanent and damaging tax increases, or uses the crisis as a pretext to expand benefits through a program that already faces durable fiscal imbalances, would undermine the nascent recovery.
The ways in which the health of the workforce and the health of Social Security are inextricably linked are manifold.
First, downturns tend to increase dependence on social programs at a time when revenues fall, presenting dual pressures on solvency. In the case of Social Security, which relies on employment taxes, the scenario can be more worrisome: Data shows there are still 32 million people claiming some form of unemployment support, which represents tens of millions of workers not currently paying Social Security taxes.
Removing barriers for getting workers back to work then is key, both for the financial health of Social Security and for workers. Data suggests retiree household income has risen twice as fast as it has for working-age households over the last 40 years; COVID-19 could exacerbate this divide if the crisis is used to justify policies that increase employment burdens for workers.
Secondly, the economic downturn affects the calculation of benefits through Social Security’s average wage index, which affects beneficiaries’ payments. House Democrats have introduced a bill to expand Social Security benefits while addressing this “notch” problem but does so by issuing general fund transfers to cover the costs.
This “notch” problem exposes contradictory elements of Social Security, which is meant to be a safety net for retirees but also penalizes seniors in several arbitrary circumstances. For example: Retirees wishing to return to work or stay employed throughout the crisis would be penalized by the Retirement Earnings Test, which establishes a threshold on earnings for working seniors. If Congress is going to fix the “notch” issue, it should consider making changes to address the disadvantages working seniors face, particularly during a crisis where seniors may need to work longer than planned to make up for the volatile economic environment.
Thirdly, the most vulnerable workers are the ones shouldering the heaviest burdens during the pandemic. The Federal Reserve estimates that 40% of the job loss from COVID-19 has been concentrated in households making less than $40,000. As I explained before the Ways & Means Social Security Subcommittee last year, this is the same population that is unduly burdened by increases in payroll taxes, which add thousands to the cost of hiring a new college grad and reduce the salaries of workers.
Lastly, payroll taxes are also disproportionately larger burdens for entrepreneurs and small businesses because they do not lower self-employment income tax liabilities. Small businesses employ nearly half of the workforce, yet the pandemic has demonstrated the disparity that exists between big corporations and small businesses when it comes to safety nets in tough times; new or higher employment taxes would further exacerbate this divide when workers can least afford it.
The challenge of saving Social Security for future generations was a steep one prior to COVID-19 and will remain after the public health crisis has abated. But without a strong employment recovery, the funding mechanism for the program suffers, workers have fewer options for retirement savings, and employers have less opportunity to grow and expand their workforce. A robust economy cannot solve all the challenges Social Security funding faces, but it is a necessary piece of any plan to secure it for generations to come.
Mattie Duppler (@MDuppler) is a contributor to the Washington Examiner’s Beltway Confidential blog. She is the senior fellow for fiscal policy at the National Taxpayers Union. She’s also president of Forward Strategies, a strategic consulting firm.
