Personal Finance

Here's how upcoming stimulus legislation could affect your Social Security

Key Points
  • As lawmakers in Washington, D.C., discuss unemployment benefits and stimulus checks, potential changes could affect how much Social Security benefits Americans receive.
  • Social Security's trust funds could run out sooner due to the pandemic, though experts don't expect a payroll tax holiday to accelerate that problem.
  • An issue affecting individuals born in 1960 could result in reduced retirement benefits, something lawmakers are looking to fix.
A view of the Capitol's Rotunda is seen reflected in an ambulance as negotiations on a COVID-19 economic bailout continue on Capitol Hill March 24, 2020, in Washington, DC.
Brendan Smialowski | AFP | Getty Images

Congress is expected to make some big decisions that will affect how much money flows to Americans in the coming weeks.

That includes possibly extending enhanced unemployment benefits and cutting a second set of stimulus checks.

But its actions could also have big consequences for payments Americans receive years down the road, namely Social Security.

President Donald Trump and the White House so far have taken a hard line on including a payroll tax cut in the next round of stimulus legislation. Lawmakers on both sides of the aisle have pushed back on including it in the bill.


Workers typically pay a 6.2% tax from their wages to fund Social Security. A payroll tax holiday would halt those contributions, at least temporarily.

Meanwhile, one side effect of the coronavirus is that individuals born in 1960 could see reduced retirement benefits over their lifetimes, a glitch that some lawmakers are looking to fix.

How Covid-19 affects Social Security

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Social Security's trust funds, which help support the system, already have an expiration date. The question is when.

The government's latest estimate in April found that the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds will run out in 2035, at which point 79% of promised benefits will be payable.

But other research has pointed to a quicker depletion of the funds, stemming from the Covid-19 pandemic.

Data from the Wharton School at the University of Pennsylvania estimates the funds could run out as soon as 2032. Meanwhile, the Bipartisan Policy Center, a Washington, D.C., think tank, has said the reserves could be depleted in 2028.

Latest on the next round of fiscal stimulus

The issue will likely prompt Congress to either raise taxes, cut benefits or a combination of both in order to shore up the system.

To date, lawmakers have mostly put the issue on the back burner. However, there is talk that some Republicans are pushing to include one proposal — the TRUST Act — in the coming stimulus legislation.

The TRUST Act would allow bipartisan committees to fast-track decisions to shore up Social Security's trust funds, in addition to the Medicare and highway trust funds, which also face funding shortfalls.

Some Social Security advocates worry that would lead to slashed benefits, if the committees decide cut payments in order to keep the trust funds afloat.

"Like payroll tax cuts, the TRUST Act is bad medicine for everyday Americans struggling to stay financially afloat, especially during the COVID crisis," said Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare.

What a payroll tax cut would mean

President Donald J. Trump signs the Tax Cut and Reform Bill in the Oval Office at The White House in Washington, DC on December 22, 2017. President-elect Joe Biden ran on a platform of repealing some of those cuts and raising the corporate tax rate to 28%, but the post-election political reality may make that difficult.
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Despite Social Security's looming shortfall, experts say they aren't worried a payroll tax cut would negatively impact the system.

"The payroll tax in and of itself shouldn't change the trajectory for Social Security," said Rachel Greszler, research fellow at the Heritage Foundation, a conservative think tank.

Social Security would be patched with general revenues, which means the ability to pay benefits wouldn't be affected. But it would increase the nation's debt.

"That is going to lead to, at some point in the future, a smaller economy and that's going to mean lower contributions into Social Security," Greszler said.

Many are against the payroll tax cut proposal for another reason: While it would help pad paychecks for those who are working, it wouldn't help those who are not. High earners would stand to benefit the most.

"It doesn't really target the people who are most in need of support right now, people who are unemployed who have been hit by a serious financial shock," said Shai Akabas, director of economic policy at the Bipartisan Policy Center.

Why some retirees could see reduced benefits

Rep. John Larson, D-Conn., speaks during an event to introduce legislation called the Social Security 2100 Act. which would increase increase benefits and strengthen the fund, on Capitol Hill on Jan. 30, 2019.
Mark Wilson | Getty Images News | Getty Images

The unprecedented pandemic has created an unforeseen consequence for one particular group of near retirees — those who were born in 1960.

This is the year that benefits will be indexed for that particular cohort, despite the fact that they will not be eligible for retirement benefits until they turn 62. The Average Wage Index used to make that calculation will decline this year, leading to lower benefits.

"What that's going to mean is that all of the years of their income, of their earnings, over their career, is going to be indexed in a way that disadvantages them," Akabas said.

Their benefits could be as much as 10% lower, Akabas said. Those born in years before and after would not be affected.

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More than 4 million individuals could be affected by this so-called notch, according to a bill proposed by Rep. John Larson, D-Conn., called the Social Security Covid-19 Correction and Equity Act.

The proposal would fix that issue for those beneficiaries, and also prevent other people from seeing a similar drop in their benefit checks due to unforeseen economic events.

Larson's bill takes aim at other Social Security issues such as increasing  benefits overall by 2% and raising the minimum benefit to 125% above the poverty level. Those fixes were included in the Social Security 2100 Act the Connecticut lawmaker previously proposed.

Those benefit increases make Larson's proposal "less bipartisan," Akabas said.

Another bill introduced by Sens. Tim Kaine, D-Va., and Bill Cassidy, R-La., also seeks to create a permanent fix for the notch anomaly. "Their bill is more squarely focused just on this element," Akabas said.

How Social Security benefits are calculated