The Covid-19 pandemic has affected us all a great deal. Although we are making adjustments, life just doesn’t quite feel the same right now, does it? Even medical scientists are finding it hard to say how long the pandemic will go on for. Economists alike are stumped about how hard it’s going to hit and how long the impending recession will last. And, worryingly, nobody quite knows how Covid-19 will affect your retirement and your savings.
When there are so many uncertainties, you need to look at the concrete facts that are available and then how they might impact you. By breaking it down and looking at important elements of your retirement such as Social Security and Medicare, we can begin to build up a picture of the lasting legacy of Covid-19 and what it might mean for you and your finances.
Covid-19 and Social Security
It’s estimated that 21% of married couples and 44% of single retired people rely on Social Security for 90% of their income in retirement. And in numerical terms, over 64 million Americans are currently receiving Social Security payments. But where does this money come from?
It comes from a trust fund that’s currently estimated at being a pot of around $2.9 trillion. The majority of the money comes from payroll taxes. Employees and their employers contribute 6.2% of the employees’ income each, and self-employed people contribute 12.4%. A small part of the funds come from other sources such as interests and reimbursements from the Treasury.
Historically that income has always been more each year than it has paid out in benefits, but this is no longer the case. Forecasts have predicted that by 2035, the trust fund will only be able to pay out 79% of benefits from money received from payroll taxes.
A key thing to remember is that Social Security is not a savings plan for the future. You’re not paying in for your retirement in the future. You’re paying in for the retirement of the old people today. Workers of the future will be paying in for yours. The workforce of the time is funding their seniors’ retirements.
What This Means for Your Retirement
Current estimates say that one million small businesses will shut due to the coronavirus outbreak, and figures from the second quarter of 2020 were already showing over 40 million job losses.
That means there’s a significant dip in the amount of money being paid into the Social Security pot, so we’re going to reach that level of depletion more quickly. The deeper the recession, and the longer until we see employment levels stabilize, the sooner the reserves will be depleted.
That doesn’t mean that Social Security will stop, but it might be reduced. States will be forced to make cuts or fund the shortfall. Income taxes might be increased to help. Retirement ages may increase and retirees with a higher income might receive less.
So what to do? Prudent savers might want to make adjustments to their retirement plans, taking into account the idea that Social Security benefits may be reduced either before or during their retirement. Ask your advisor to consider your bigger picture, and see how Covid-19 will affect your retirement in terms of Social Security benefits.
You may also want to consider actions you can take now to make sure you’re maximising your Social Security payments when you’re due to receive them. These actions include planning to work for longer, as the amount of Social Security that you’ll receive on retirement increases significantly year-on-year as you work later in life.
Covid-19 and Medicare
There’s a distinct possibility that Covid-19 will affect your retirement in other ways, too. At the moment, 62 million retirees are relying on Medicare. But Medicare relies on a healthy economy, too. It’s funded partially by income taxes, partially by federal revenue and only 15% is paid for by beneficiary premiums.
The funds behind Medicare rely as heavily on payroll tax receipts as the trust fund that supports Social Security payments, so when employment is down, so are contributions to Medicare. Thankfully, part of the CARES Act involved an immediate injection of funds to help prop up Medicare, but that alone won’t keep it going.
Like Social Security, the trust fund for Medicare was forecast to run into trouble earlier, around 2026. Covid-19 could then bring Medicare’s insolvency date even closer, meaning it might be in a very different state by the time you reach your retirement.
If you’re worried about how Covid-19 will affect your retirement and your healthcare, you might like to think about the benefits of a Health Savings Account to make sure that you have the right coverage in your later years. Health Savings Accounts can be used to pay your Medicare premiums, so if they increase as a direct or indirect result of Covid-19, you won’t have too much to worry about.
Worried that Covid-19 Will Affect Your Retirement?
Unfortunately, there is a large possibility that Covid-19 will affect your retirement, especially if you are getting close to retirement age – or are already there. However, there are always things to do about it, to mitigate the worst of the impact. If you would like to discuss what this might mean for you, please get in touch.
We can assess your current situation and look into the future to see what Covid-19 might mean for you. Then we can devise a strategy with you, making sure that we take every opportunity to protect your retirement from the lasting legacy of Covid-19.