Panel on Social Security and COVID-19 Labor Market Effects
The 2021 NBER Summer Institute's Economics of Social Security meeting featured a panel discussion on the implications of COVID-19 related disruptions in the US labor market for Social Security. NBER President James Poterba introduced the panel by noting that the pandemic could affect Social Security in many ways, including through effects on economic growth, long-term fertility, and mortality, as well as on labor market outcomes such as labor force participation and wages.
Stephen Goss, Chief Actuary of the Social Security Administration (SSA), and Karen Glenn, Deputy Chief Actuary, began the discussion by jointly presenting the updated baseline that the SSA published in the fall of 2020. That baseline included assumptions that accounted for the effects of the pandemic and associated recession on Social Security, and it was informed by data current through September 2020. Glenn and Goss highlighted a number of features of the baseline. The baseline mortality projections in the fall of 2020 underestimated pandemic-related excess deaths during the winter of 2020–21, and the SSA currently projects that excess mortality in 2021 will likely be similar to that in 2020. The SSA also predicts lower total fertility due to deferred births during the pandemic. The SSA’s real GDP forecast is broadly consistent with current projections by leading private-sector forecasters, as well as the Congressional Budget Office. Projections of future labor force participation rates vary widely among professional forecasters; the SSA’s updated baseline is aligned with the forecasters who anticipate a relatively large future labor force. Expectations of future nominal wages and salaries among professional forecasters are currently more optimistic than the SSA’s 2020 forecast. Although the SSA baseline projected that the national average wage index (AWI), or the ratio of total wages to the total number of at-any-time workers, would decline by 4 percent in 2020 relative to 2019, data released since the baseline was prepared show that economic growth swiftly rebounded and decreased employment and earnings were concentrated among part-time and lower-paid workers. As a result, aggregate wages increased in 2020; AWI is expected to increase also. Glenn and Goss noted that the SSA has not seen evidence yet of older workers applying for retirement benefits earlier than they would have otherwise, nor evidence of increased DI applications. The updated baseline projects that the reserves of the combined Old Age and Survivors, and Disability Insurance Trust Funds will be depleted in 2034, about a year sooner than projected in the 2020 Trustee’s Report.
NBER Research Associate Katharine Abraham of the University of Maryland used the SSA projections to motivate her discussion of the effects of the pandemic on labor force participation. She began with an examination of historical participation trends. She noted that the roughly 4 percentage point decline in the total labor force participation rate in the two decades prior to the pandemic was driven by a myriad of factors, including the aging of the Baby Boomers and large declines in participation among in-school youth and non-college-educated 25- to 54-year-olds. This aggregate decline was partially offset by older workers (55+) at all education levels working longer. Currently, the recovery in labor force participation has stalled several percentage points below its pre-pandemic levels. Health concerns could be a potential explanation for this development, given the disproportionate declines among individuals aged 65+. Childcare challenges or other family responsibilities are not likely explanations because there has been little difference in the labor force participation decline for women with and without young children. Labor market data do not suggest unemployment insurance disincentives are likely explanations either. Abraham concluded by observing that health concerns may have continuing effects on labor force participation, that recent retirees are unlikely to reenter the labor force, and that increased teleworking could have permanent labor supply effects.
Michael Stepner of the University of Toronto and Opportunity Insights discussed key potential drivers and questions around the asymmetric recovery in employment between those in the top- and bottom-income quartiles over the course of the pandemic. The significant decline in economic growth in the first half of 2020 was largely driven by a pronounced decline in consumer spending, especially among high-income earners. Roughly two-thirds of the overall decline was due to a drop in spending on in-person services. While employment for the top-income quartile largely recovered by June 2020, the recovery in employment for the bottom-income quartile stagnated in mid-2021, and in mid-May 2021 there were 7.2 million fewer job holders than prior to the pandemic, a decline of about 23 percent. The stagnant recovery cannot be explained by the mix of industries where these workers were employed, the counties where they worked, pre-pandemic, nor by the moral hazard effect of expanded unemployment insurance (UI) benefits. Liquidity effects of the expanded safety net and a change in worker preferences for a higher reservation wage could explain some of the gap.
Finally, NBER Research Associate Till von Wachter of the University of California, Los Angeles discussed California’s labor market outcomes during the pandemic, with special reference to UI claims and the long-term effects of job losses on retirement. He noted that UI claims, like job losses, were concentrated among Black, Hispanic, and older workers. The unequal distribution of job losses across income classes, greater at lower incomes, might increase the short-run risk of labor force exits and earlier claims for Social Security benefits, especially by older lower-income workers. Von Wachter noted that labor market data in California suggest that UI benefits can preserve labor force attachment. He also observed that while the COVID-19 employment shock caused short- to medium-term employment losses, over the long term, due to reduced lifetime earnings, it could result in longer working lives and later claiming of Social Security benefits.