TheMoneyGeek Unplugged

In a recent survey, 87% of Americans said that Congress should act now to shore up the Social Security program rather than waiting 10 years to find a solution. The sooner they do, the better.

Each year, the Social Security and Medicare trust fund Trustees provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, released on May 6, 2024, show that Social Security and Medicare continue to face significant financial challenges.

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon so that solutions will be less drastic and may be implemented gradually.

Despite the challenges, it’s important to remember that neither of these programs is in danger of collapsing completely. The question is what changes will be required to rescue them.

More Retirees and Fewer Workers

The fundamental problem facing both programs is the aging of the American population. Today’s workers pay taxes to fund benefits received by retirees, and with lower birth rates and longer life spans, fewer workers pay into the programs, and more retirees receive benefits for a longer period. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024, there were 2.7, projected to drop steadily to 2.3 by 2040.

Dwindling Trust Funds

Payroll taxes from today’s workers and income taxes on Social Security benefits go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now, the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers, their families, and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, and disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, unchanged from last year’s report. At that time, incoming revenue would pay only 79% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75 years ending in 2098.

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the hypothetical combined program, referred to as OASDI. This would extend full benefits to 2035, a year later than last year’s report, at which time, incoming revenue would pay only 83% of scheduled benefits.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI Trust Fund will contain surplus income through 2029 but is projected to be depleted in 2036, five years later than last year’s report. At that time, revenue would pay only 89% of the program’s costs. Overall, projections of Medicare costs are highly uncertain.

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government’s general fund. Still, financing must increase faster than the economy to cover expected expenditure growth.

Possible Fixes

Based on this year’s report, if Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted. Any permanent fix to Social Security would likely require a combination of changes, including:

• Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.73% would be necessary to address the long-range revenue shortfall (or 16.42% if the increase starts in 2035).

• Raise the ceiling on wages subject to Social Security payroll taxes ($168,600 in 2024).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Addressing the Medicare shortfall might necessitate spending cuts, tax increases, and cost-cutting through program modifications.

Based on past changes to these programs, future changes are likely to primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes that may affect you in the future.

Many people believe the social security system will not be around when it’s their turn to collect benefits. I don’t believe that to be the case. Based on everything I’ve studied, I believe Congress will act, but not any sooner than they have to, or perhaps when it becomes a crisis. And when they do, combining some or all of the above techniques will extend the social security fund and medicare benefits for many more decades. There’s no rush, in my opinion, to collect benefits as soon as possible out of fear of the system running out of money.

You can view a summary of the 2024 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

All projections are based on current conditions, subject to change, and may not come to pass.

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