Each year, the Trustees of the Social Security and Medicare trust funds provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that trust funds would be depleted in the not-too-distant future, and the most recent reports 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 keep in mind that neither of these programs is in danger of collapsing completely. The question is what type of 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 today’s retirees, and with lower birth rates and longer life spans, there are fewer workers paying into the programs and more retirees receiving benefits for a longer period of time. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2024 there are 2.7, projected to drop steadily to 2.3 by 2040.
Dwindling trust funds
Payroll taxes from today’s workers, along with 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 and their families and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; 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 which 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-year period ending 2098.
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 in 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, but financing will need to increase faster than the economy to cover expected expenditure growth.
Possible fixes
If Congress does not take action, Social Security beneficiaries might face a benefit cut after the trust funds are depleted, based on this year’s report. Any permanent fix to Social Security would likely require a combination of changes, including some of these.
- Raise the Social Security payroll tax rate (currently 12.4%, half paid by the employee and half by the employer).
- 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 a combination of spending cuts, tax increases, and cost-cutting through program modifications.
Plan Ahead
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. A financial planner could walk you through running a retirement planning scenario with a lesser social security benefit for your specific situation to help you devise a plan that you are comfortable with.
CRA Investment Committee
Matt Reynolds CPA, CFP® Tom Reynolds, CPA
Robert T. Martin, CFA, CFP® Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC® Joseph McCaffrey, CFP®
Phillip Tompkins, CFP®
(This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.)
