Social Security: How 2023 Recession Could Impact Program Long-Term
The prospect of a 2023 recession will bring no joy to the Social Security Administration, which is already battling everything from inadequate funding to proposed legislation that would reduce benefits for future generations.
A recession would put even greater financial pressure on the SSA and its beneficiaries, according to a press release from the Senior Citizens League, a nonpartisan seniors advocacy group. Recessions often lead to layoffs, which would reduce the amount of payroll taxes that currently fund about 90% of Social Security.
Layoffs would also cause “a significant worsening” in the finances of Social Security trust funds that help fund retirement and other benefits, the Senior Citizens League said.
The SSA has already spent years dipping into its trust funds amid a steep rise in the retirement of baby boomers — so much so that the Old-Age and Survivors Insurance Trust Fund, which pays retirement benefits, is projected to run out of money by the middle of next decade. When that happens, payroll taxes will only be able to cover about 78% of the benefits in each ensuing year, as GOBankingRates previous reported.
But that’s more of a long-term problem. For now, Social Security’s cash reserves appear to be on solid footing. Combined, the OASI and Disability Insurance Trust Fund had nearly $2.81 trillion invested in special-issue bonds and certificates of indebtedness at the end of November 2022, The Motley Fool reported.
The bigger immediate concern is the threat to payroll taxes. During the Great Recession, the amount of payroll taxes collected by Social Security fell by nearly $35 billion between 2008 and 2010 alone. That dip coincided with an increase in the amount of money Social Security paid out.
Another way a recession would impact Social Security is that its interest-earning potential would decline. Because the Federal Reserve tends to lower interest rates during a recession, the trillions of dollars the SSA invests in bonds and certificates of indebtedness will see lower returns.
That might not be as big a threat in 2023 because of the Fed’s intention to keep raising rates to tame inflation. Longer term, however, a prolonged recession would likely cause the central bank to reverse course and start lowering rates.
Finally, a recession could impact the age at which Americans decide to start collecting Social Security. If job losses and financial insecurity cause a large number of Americans to start collecting benefits earlier than normal, it will put an additional strain on Social Security.
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