Social Security and Medicare are federal programs that provide income and health insurance to qualifying populations, mostly older Americans and the disabled. Beneficiaries of both programs have been severely impacted by the COVID-19 pandemic. The most devastating outcome: Of the 574,045 COVID-19 attributable U.S. deaths as of May 15, 2021, nearly 80% (458,645) were people aged 65 or older.
Millions of Social Security and Medicare recipients who survived the COVID surge have been affected as well—or will be—by the impact of the pandemic on those programs. This article discusses Social Security and Medicare through the lens of the COVID-19 pandemic and its aftermath.
How Social Security Works
Social Security is commonly known as a “pay-as-you-go” retirement benefit. Current workers and their employers pay into the program through payroll taxes. The money goes into the Social Security Trust Fund, which pays benefits to current recipients.
Originally, the amount put in by workers was greater than the amount withdrawn by recipients. That is no longer true, since the number of workers has gone down and the number of recipients has gone up. Eventually, the Social Security Trust Fund balance will reach zero if nothing is done. When that happens, Social Security recipients will only receive their share of what current workers put in which, according to experts will amount to 77% of today’s full benefit amount.
None of this has anything to do with COVID-19. The potential drawing down of the Social Security Trust Fund balance was “baked into the cake” well before COVID. That does not mean COVID-19 has had no impact.
Impact of COVID-19 on the Social Security Trust Fund
Before COVID, experts predicted the Social Security Trust Fund would reach zero by 2035. With the arrival of COVID, due to some of the forces discussed below, that date has been moved up to 2033, assuming payroll taxes drop 20% for two years, as predicted.
Payroll taxes are expected to drop, at least temporarily, for several COVID-related reasons:
- Higher unemployment due to closed businesses
- Lower wages due to restricted hours
- Deferral of withholding of payroll taxes to provide relief to workers and businesses
- More workers signing up for benefits due to becoming unemployed
- Higher death rates (though fewer recipients could minimize the impact)
Impact of COVID-19 on National Average Wage Index
The amount you receive in Social Security benefits depends, in part, on something called the National Average Wage Index (NAWI). NAWI tracks wage growth to measure inflation. Due to COVID, the wage index for 2020 is expected to be lower than normal.
If you turned 60 in 2020, this lower wage index will affect the amount you receive in Social Security benefits. That’s because the Social Security Administration (SSA) uses the wage index from the year you turn 60 as part of the formula used to determine your lifetime benefit amount.
In September 2020, the Congressional Budget Office (CBO) predicted the 2020 NAWI would be -3.8% compared to 2019. More recently the CBO has said it expects the 2020 NAWI to be closer to -0.5%,. This means that, for anyone turning 60 in 2020, benefits will be lower, but not as low as originally predicted.
Impact of COVID-19 on Social Security Disability Payments
Social Security actuaries predicted in November 2020 that COVID-19 survivors could suffer lingering effects, resulting in an increase in the number of people applying for Social Security disability payments in 2021, 2022, and 2023. After this, applications are expected to return to the baseline.
Impact of COVID-19 Legislation on Social Security
COVID-19 legislation affects Social Security and Social Security recipients, including those on Supplemental Security Income (SSI), in several ways.
- Created Economic Impact Payments (EIPs) of $1,200 (CARES Act), $600 (Consolidated Appropriations Act 2021), and $1,400 (American Rescue Plan Act of 2021)
- Reduced FICA taxes owed by certain employers, delayed payment of FICA—and, at the same time, ensured that the Social Security Trust Fund would not be not 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 SSA prevent, prepare for—and respond to—coronavirus (CARES Act)
- Extended the date by which employees must repay payroll tax obligations (Consolidated Appropriations Act 2021)
- Expanded eligibility/amount of Child Tax Credit (CTC) and Earned Income Tax Credits (EITC) (American Rescue Plan Act of 2021)
- Made no changes to statutory exclusion of CTC and EITC for SSI purposes (American Rescue Plan Act of 2021)
Long-Term Impact of COVID-19 on Social Security
Social Security actuaries, on March 17, 2021, 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 2023
- GDP, productivity, and earning levels permanently lowered by 1%
How Medicare Works
Medicare is a federal health insurance program for people who are 65 or older, disabled, or who have End-Stage Renal Disease (ESRD). Medicare is financed through a combination of payroll taxes, government funding, and premiums paid by participants. It is run by a branch of the 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) and SMI pays for Part B (medical) and Part D (prescription drugs).
The HI Trust Fund, just like the Social Security Trust Fund, is primarily financed through payroll taxes. And just as with Social Security, the HI Trust Fund suffered from decreased funding long before COVID came along. The HI trust fund is projected to be depleted by 2026, at which point it will no longer be able to pay the full amount of Part A hospital costs. Instead, current projections are that the fund will only be able to cover 90% of projected benefit payments. It's worth noting that the 2026 projected insolvency date does not reflect the impact of COVID-19.
Since the SMI trust fund gets most of its money from premiums and government funding, it will never go broke. However, increased premium costs and dependence on increased government funding will continue to create their own vulnerabilities for this fund.
Impact of COVID-19 on Medicare Trust Funds
Due to the way funding occurs, the Medicare HI Trust Fund has been more impacted financially by COVID than the SMI Trust Fund. As noted, with the SMI fund, the lion's share of cost has fallen on beneficiaries.
The 2020 Medicare Trustees Report notes that: “given the uncertainty associated with these (COVID-19) impacts, the Trustees believe that it is not possible to adjust the estimates accurately at this time.”
CBO estimates call for about 2 million Medicare beneficiaries to be admitted to a hospital with COVID during the pandemic and assume that about 1 million of them would be traditional Medicare beneficiaries at hospitals paid under Medicare’s inpatient prospective payment system. According to CBO estimates, this would increase Medicare spending by about $3 billion during FY2020 and FY2021.
The SMI Trust Fund, because of the way it is financed, cannot become insolvent. The CRS report points out, however, that as care has shifted from inpatient (Part A) to outpatient (Parts B and D) settings, a greater portion of Medicare spending is being covered by beneficiary premiums and government funding. Medicare trustees estimate that the portion of personal and corporate income taxes needed to fund SMI will "increase from about 15.8% in 2020 to about 22.1% in 2030 and 30.1% in 2094."
Impact of COVID-19 on Medicare Recipients
Medicare recipients are especially vulnerable to COVID-19. In addition to potential death or long-term disability, the pandemic has resulted in a number of negative outcomes for beneficiaries.
One CMS survey found that:
- 21% have forgone non-COVID-19 care during the pandemic.
- 15% reported feeling less financially secure.
- 41% reported problems with stress.
- 38% said they were less connected with family and friends.
For those 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 vaccine is provided to Medicare recipients at no cost to them.
- 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.
Impact of COVID-19 on Medicare Providers
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 for all fee-for-service (FFS) claims declined by 39%, 33% for inpatient services, and 49% for physician services.
- By the week ending July 1, 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.
- There was considerable geographic variation in the magnitude of both the utilization declines and the rate of recovery.
Impact of COVID-19 Legislation on Medicare
The impact of COVID-19 legislation on the Medicare program is reflected in the sheer volume of Medicare-related regulatory changes enacted by that legislation. Consider that between January 1 and July 24, 2020, more than 200 Medicare-related regulatory changes were made. Between July 25, 2020, and January 8, 2021, an additional 49 changes were added.
The driver of those regulatory changes, COVID-19 legislation, includes the following actions:
- Expands Medicare coverage for telehealth services (CARES Act)
- Eliminates Medicare cost-sharing for COVID vaccines (CARES Act)
- Increases some Medicare payment rates to providers (CARES Act)
- Waives some hospital length-of-stay requirements (CARES Act)
- Further increases Medicare payment rates to physicians (CAA)
- Eliminates Medicare’s sequestration cuts through March 2021 (CAA)
Long-Term Impact of COVID-19 on Medicare
The Medicare system provides healthcare coverage to people 65 and older, as well as those under 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 going forward.
Prior to 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 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.