Social Security and Medicare are federal programs that provide old-age, disability, and health insurance benefits, mostly to older Americans, their survivors, and the disabled. COVID-19 has severely affected the beneficiaries of both programs without appreciably changing the programs' longer-term prospects, which were already troubled before the pandemic.
As of July 20, 2022, more than 1 million Americans had died from COVID-19, with those 65 and older accounting for nearly three-quarters of that total. Medicare beneficiaries in nursing homes proved especially vulnerable, with 2 in 5 likely contracting COVID-19 in 2020 alone based on claims data, while the mortality rate in nursing homes rose to 22% that year, from 17% in 2019.
Medicare's Hospital Insurance fund saw an initial receipts shortfall as the economic downturn caused by COVID-19 reduced payroll taxes, even as pandemic treatment and prevention costs increased. At the same time, the rise in those costs was more than offset by the decline in elective services as some patients avoided non-emergency care out of caution.
Medicare patients who succumbed to the disease also incurred medical costs significantly above the program's average before the pandemic, so that the healthier profile of the survivors reduced program costs by 1.5% in 2020 and 2.9% in 2021, according to the Medicare Trustees' 2022 annual report, with smaller annual savings expected to persist as a result until 2028.
The offsetting effects of the declines in funding and spending and the likelihood the pandemic will wane suggest it won't have a significant long-term effect on Medicare's finances, according to the trustees.
Similarly, the long-term prospects of the Social Security trust funds remain unchanged by the pandemic, according to the funds' trustees.
- COVID-19 has been particularly deadly for Social Security and Medicare beneficiaries, with those 65 and older accounting for three-quarters of the more than 1 million U.S. deaths attributed to the pandemic as of July 2022.
- Medicare spending fell 9.3% in 2021 as beneficiaries deferred care.
- Medicare saved 1.5% of costs in 2020 and 2.9% in 2021 because beneficiaries who succumbed to COVID-19 used more services than the program's average.
- Medicare's hospital insurance trust fund was projected by trustees in 2022 to deplete its reserves in 2028, two years later than predicted in 2021.
- Social Security's old-age trust fund was projected in 2022 to run out of reserves in 2034, a year later than predicted the prior year, after economic growth in 2021 proved stronger than expected.
- The COVID-19 pandemic is not expected to materially affect the long-term burdens imposed on the Social Security and Medicare trust funds by the aging of the U.S. population and rapidly increasing healthcare spending.
How Social Security Works
Social Security provides old-age and disability benefits financed by dedicated payroll taxes as well as the accumulated surplus of past receipts. Social Security tax receipts go into two Social Security trust funds that use them to pay benefits, investing any surplus in U.S. government debt.
For many years annual tax receipts exceeded benefit payouts by a wide margin, building up a surplus in the trust funds. That changed in 2021 as outlays topped receipts, and annual deficits are expected to widen significantly in the near future as more Baby Boomers retire, leaving fewer workers to fund benefits for each retiree. The trust fund for Social Security's old-age and survivors benefit is projected to run out of reserves in 2034 with ongoing receipts covering 77% of scheduled benefits, according to Social Security trustees' 2022 Annual Report.
Impact of COVID-19 on the Social Security Trust Fund
Social Security's projected long-term funding shortfall isn't the result of COVID-19, nor did its extent change appreciably because of the pandemic.
After moving up the projected year of depletion for the main Social Security trust fund from 2034 to 2033 in their annual report for 2021, Social Security's trustees moved it back to 2034 in the report for 2022. "The economic recovery from the brief recession in 2020 has been stronger and faster than assumed in last year’s report," the trustees noted.
A rebound in births in 2021 led the trustees to assume no further decline in 2022, as they had a year earlier, and no change in the long-term fertility rate. Meanwhile, the pandemic was expected to keep death rates among those 65 and older elevated through 2023 albeit well below those prevailing in 2020-2021.
Impact of COVID-19 Legislation on Social Security
COVID-19 legislation affected Social Security and its recipients, as well as those receiving Supplemental Security Income (SSI) also administered by the Social Security Administration (SSA), in several ways:
- Authorized economic impact payments of $1,200 (Coronavirus Aid, Relief, and Economic Security [CARES] Act), $600 (Consolidated Appropriations Act [CAA], 2021), and $1,400 (American Rescue Plan Act of 2021)
- Reduced Federal Insurance Contributions Act (FICA) taxes owed by certain employers, delayed FICA payments by employers, and ensured the Social Security Trust Fund would not be adversely affected by the delay (CARES Act)
- Suspended collection of student loan debt from Social Security benefits (CARES Act)
- Provided $300 million through Sept. 30, 2021, to help the SSA prevent, prepare for, and respond to the pandemic (CARES Act)
- Extended the repayment due date for employers' payroll tax obligations (CAA)
- Increased the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) and expanded eligibility criteria for the benefits (American Rescue Plan Act of 2021)
Social Security trustees have concluded that the long-range implications of COVID-19 on Social Security would be “minor,” with any pandemic-induced recession recovered by 2023 with “little permanent effect.” Over the near term, however, the agency predicts several outcomes that will affect Social Security, including:
- Lower birth numbers in 2020 and 2021
- Higher-than-normal mortality rates in 2020 (12%), 2021 (6%), and 2022 (2%)
- Disability applications lower in 2020 but higher in 2021 and 2022
- Employment reduced in 2020 but fully recovered by mid-2023
- Gross domestic product (GDP), productivity, and earning levels permanently lowered by 1%
How Medicare Works
Medicare is a federal health insurance program for people age 65 or older, as well as younger people who are disabled or have end-stage renal disease. Medicare is funded with a combination of payroll taxes, government spending, and premiums paid by participants. It is run by a branch of the U.S. Department of Health and Human Services (HHS) known as the Centers for Medicare and Medicaid Services (CMS).
Medicare is paid for through two trust funds: the Hospital Insurance (HI) Trust Fund and the Supplemental Medical Insurance (SMI) Trust Fund. HI pays for Medicare Part A (hospitalization), while SMI covers Part B (medical) and Part D (prescription drugs).
The HI Trust Fund, like the Social Security trust funds, is primarily funded with payroll taxes. And as with Social Security, the HI Trust Fund was already on a trajectory to run out of reserves eventually when COVID-19 struck. The fund is now projected to be depleted in 2028, two years later than predicted in the trustees' 2021 report. At that point, ongoing fund receipts would cover 90% of scheduled benefits.
The SMI Trust Fund is expected to remain adequately funded because government funding and premiums reset each year to cover spending on Medicare parts B and D. But the costs of those services are expected to outpace economic growth, requiring proportional appropriations and premium increases.
Medicare trustees estimate SMI funding requirements will increase from 18.5% of personal and corporate income tax receipts in 2021 to 21.5% in 2030 and 30.5% by 2080.
Impact of COVID-19 on Medicare Trust Funds
COVID-19 caused the unusual 9.3% decline in Medicare outlays in 2021, as savings from the beneficiaries' deferral of elective care more than offset increased pandemic spending. As noted above, the reduced morbidity of Medicare's population following deaths caused by COVID-19 accounted for 2.9 percentage points of the savings, Medicare trustees estimate. Meanwhile, Medicare trust funds receipts declined by just 1.4%.
Because spending fell so much more than income, Medicare trust funds' assets increased by $48.3 billion to $325.7 billion, including the HI fund's gain of $8.5 billion to $142.7 billion. The HI Trust fund is expected to register a larger surplus for 2022 in a continuation of the COVID-19 trends, before posing growing annual deficits in subsequent years.
Impact of COVID-19 on Medicare Recipients
The advanced age of most Medicare recipients makes them much more vulnerable to COVID-19 than the general population, on average. Negative outcomes of the pandemic extend beyond the deaths and hospitalizations it has caused.
Medicare recipients (and others) are advised to follow up on all medical appointments, including physicals, to make sure that they continue to manage their health during the ongoing pandemic.
One CMS survey found that during the pandemic:
- 21% reported feeling more lonely or sad.
- 15% reported feeling less financially secure.
- 41% reported more stress or anxiety.
- 38% said they were less connected with family and friends.
For Medicare recipients receiving care at home, COVID-19 impact findings included:
- The need for social service support increased.
- Loneliness and depression increased.
- Physical and mental health conditions became exacerbated.
- Substance use and abuse increased.
- Evidence of domestic violence increased.
- Staff and equipment were limited.
On the positive impact side of the equation:
- COVID-19 vaccines are free for Medicare recipients.
- Lab tests are provided at no cost.
- Antibody tests and treatments are provided at no cost.
- Expanded telehealth services are available at no cost.
- Medically necessary hospitalization is covered.
Providers, including physicians and hospitals, have been affected by the pandemic almost from the beginning. During the first six months of the pandemic, for example:
- Payments declined by 39% for all fee-for-service (FFS) claims, 33% for inpatient services, and 49% for physician services.
- By the week ending July 1, 2020, weekly payments had risen to 96% of 2019 levels, 93% for inpatient services, and 95% for physician services.
- At the end of June 2020, cumulative payment deficits relative to 2019 ranged from 12% to 16%.
- The use of individual preventive screening and surgical services declined substantially during March and April of 2020.
- There was considerable geographic variation in the magnitude of both the utilization declines and the rate of recovery.
More than 200 regulatory changes affecting Medicare went into effect between Jan. 1, 2020 and July 24, 2020. An additional 49 changes were made between July 25, 2020 and Jan. 8, 2021.
Impact of COVID-19 Legislation on Medicare
The impact of COVID-19 legislation on the Medicare program is reflected in the sheer volume of the resulting regulatory changes.
- Expanded Medicare coverage for telehealth services (CARES Act)
- Exempted COVID-19 vaccines from Medicare cost sharing rules (CARES Act)
- Increased some Medicare payment rates to providers (CARES Act)
- Waived some hospital length-of-stay requirements (CARES Act)
- Further increased Medicare payment rates to physicians (CAA)
- Eliminated Medicare’s sequestration cuts through March 2021 (CAA)
The Medicare system provides healthcare coverage to people ages 65 and older and those under age 65 with disabilities. These populations are the most vulnerable when it comes to COVID-19. In addition to health concerns, these same populations will be financially vulnerable in the future.
Before COVID-19, many Medicare beneficiaries with limited income and preexisting conditions faced financial hardship with high out-of-pocket healthcare costs. While regulatory changes have helped with the financial burden in the short term, many of those changes will expire or be rescinded once the health crisis is over.
Lack of employment post-pandemic, which can lead to early retirement, only exacerbates the financial burden on Medicare recipients. The problem is even worse for older members of minority communities, who have disproportionately lower earnings during their working years, yielding lower Social Security payments and leaving them with lower retirement savings. While the Social Security system anticipates a number of short-term challenges, for Medicare recipients, the financial burden will continue to be a problem well into the future.
How Has COVID-19 Affected Social Security?
COVID-19 is not expected to have a significant long-term effect on Social Security, in part because the recovery from the recession caused by the pandemic proved stronger than Social Security trustees projected a year earlier. As a result, the trustees' 2022 report projects the Social Security trust fund paying old-age benefits will run out of reserves in 2034, a year later than projected in 2021.
How Has COVID-19 Affected Medicare?
COVID-19 has been deadly for Medicare clients, with those 65 and older accounting for about three-quarters of the more than 1 million U.S. deaths attributed to the pandemic as of July 2022. At the same time, the pandemic has been a big money saver for the Medicare program, which saw spending decline and reserves rise in 2021 amid deferrals of healthcare. The higher morbidity rate among Medicare's sickest recipients reduced costs by 1.5% in 2020 and 2.9% in 2021, Medicare trustees estimate, and is expected to continue generating savings until 2028. Medicare's hospital insurance trust fund is now expected to exhaust its reserves in 2028, two years later than projected in 2021.
How Did the U.S. Government Respond to COVID-19?
To address the consequences of the pandemic, U.S. Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA) during the presidency of Donald Trump, and the American Rescue Plan Act under President Joe Biden. The measures offered many Americans up to $3,200 in direct payments, in addition to many other provisions supporting the economy and addressing the pandemic.