COVID-19, Demographic Change, and the Future of Social Security

It’s been more than two years since the onset of COVID-19, and policy experts are examining the effects the pandemic might have on the long-run fiscal health of important programs such as Social Security. Although the ultimate impacts of the pandemic won’t be known for years, some patterns are beginning to emerge.

Short-Term Effects

Although COVID-19 had a sudden, profound impact on the U.S. economy, its impact on the fiscal health of Social Security has been modest, with very small movements in the combined trust fund reserve depletion date pre- and post-COVID as projected by the Social Security Board of Trustees. In their 2020 report (which used economic data before the onset of COVID) they projected a depletion date of 2035; the 2021 report, which incorporated COVID impacts, showed a depletion date one year earlier; however, with the rapid and robust economic recovery, far stronger than what was anticipated in the early stages of the pandemic, the 2022 report showed an increase to 2035 once more.

Since 1992, the depletion date projected by the trustees has varied from as early as 2029 to as late as 2042 (changes in demographic and economic assumptions, as well as projection methods, can alter these dates). Taken in this context, a one-year change in the date is considered quite modest. Of course, if new, more dangerous variants of the virus emerge in the years ahead, the impact could be larger.

COVID-19 and Fertility

Although birth rates unexpectedly ticked upward in 2021, up 1 percent from 2020, it was the first increase since 2014, and the trustees believe the pandemic will not have any significant effects on fertility in the future. Their reasoning stems from the fact that the impacts of COVID appear to be waning, and several factors known to be associated with lower birth rates remain relevant – women continue to work in the paid labor force at higher rates, get married at older ages, and have a higher likelihood of remaining single. Fertility is a significant factor to the long-term financial status of Social Security since more births means more workers contributing to the program’s revenues.

COVID-19 and Mortality

COVID disproportionately impacts older people; since the start of the pandemic three-quarters of all COVID deaths have been among people 65 and over, and evidence suggests that currently almost 9 out of 10 COVID deaths are among those 65 and over. Residents of nursing homes have been particularly hard hit; approximately 210,000 have died nationwide due to the pandemic. Although those 65 and over make up just 16 percent of the population, they receive about 82 percent of all Social Security benefits. The trustees project (Table V.A1) these mortality impacts, and although COVID led to upticks in death rates for those 65 and over from 4.4 per hundred people in 2019 to 5.1 per hundred people in 2021, they project rapidly declining impacts through 2023 with improved vaccines and treatment options.

Beyond 2023, the trustees believe COVID’s impacts on older Americans will continue to wane, and that the long-term trend points to continued declines in mortality due to myriad factors – better nutrition, improvements in medical technology, and more widespread access to health services. At the same time, there have been some worrying developments in mortality that create uncertainty going forward. Life expectancy among those 25 to 64 has actually worsened over the last two decades, largely due to mental health and opioid addiction challenges. As earnings inequality has risen in recent decades, life expectancy for those with low earnings has actually decreased. Finally, certain demographic groups, notably Black Americans, Hispanic Americans and Native Americans saw large reductions in life expectancy at birth due to COVID, and it’s not known how quickly the situation will improve.

A Longer-Term Challenge

The fundamental challenge for Social Security’s financial future is the long-term decline in the number of workers per beneficiary. In 1960, 5.1 workers paid into Social Security for each Social Security beneficiary; by 2000 it was 3.4 workers per beneficiary, and by 2021, 2.8 workers per beneficiary. The trustees project a slow and steady continued decline to 2.1 workers per beneficiary by 2065. (Annual Report of the Board of Trustees, Table IV.B3, page 63)

What is driving this shift in the age distribution? While the trustees examine a multitude of factors, they focus on long-term movements in two areas. First, there has been a steady decline in birth rates in post baby boom generations, meaning fewer working-age people paying into the system. Second, despite COVID’s unknown long-term health impacts, which could alter the number of older workers paying into Social Security or how many people receive disability insurance benefits, improvements in health at older ages have led to greater longevity, resulting in more beneficiaries receiving benefits over a longer retirement.

For example, in 1990, a 65-year-old man could expect to live another 15 years; it is now just over 18 years. For women, a 65-year-old could expect to live another 19 years in 1990; it is now up to 21 years. Moreover, life expectancy is positively associated with lifetime earnings, so those with higher earnings – and as a consequence higher monthly benefits – receive them over a longer period of time.

Understanding that even slight differences in long-run fertility and mortality assumptions can lead to very different estimates of the program’s future financial health, the trustees assess the sensitivity of their results by modeling three different scenarios (page 183) – the one they consider most likely (known as the “Intermediate”), a more optimistic version, and a more pessimistic version. Moreover, to understand better the effects of different assumptions at different points in the future, the trustees evaluate the solvency impacts over the next 25-, 50- and 75-years.

The Likely Long-Term Picture and the Need for Action

With no Congressional action to modify Social Security’s revenue and/or expenditures, the program is projected to have costs far in excess of revenue over 25-, 50-, and 75-year time frames in all three trustee modeling scenarios. Without updates that take account of the broader demographic shifts already discussed and economic changes since the 1980s, such as rising earnings inequality, its trust fund reserves will be depleted in 2035, and incoming payroll tax revenues will only be able to cover 80 percent of promised benefits for Social Securities’ myriad beneficiaries – retired and disabled workers, their spouses, and survivors. There is still time to act, and the earlier Congress does the less severe the changes will need to be.