Social Security and Medicare remain under financial pressure due to the wave of baby boomers who are retiring and the coronavirus pandemic. Each year, the trustees of the Social Security and Medicare Trust Funds release a report on the projected financial status of the social insurance programs. The reports provide insight into the operations of these social insurance programs and comprehensive analysis of their outlook. The reports have consistently shown that social security and Medicare both face long-term financial shortfalls based on current scheduled benefits and financing. However, these social insurance programs are not projected to go bankrupt, and there are several changes Congress could make to ensure they remain solvent for future generations.
What is the Projected Financial Outlook for Social Security and Medicare?
Before the coronavirus pandemic, trustees predicted that the Social Security trust fund, which pays retirement benefits and disability benefits, would be depleted by 20351. The pandemic has only further exacerbated the erosion of the trust fund reserves, by causing record levels of unemployment and reducing the amount of payroll taxes collected for the program. Now, the trustees have projected that the trust fund reserves will be unable to pay benefits starting in 2034, a year earlier than previously forecasted, if Congress does not address the funding shortfall2.
This does not mean that it will stop paying benefits entirely. Once the trust fund reserves are depleted, payroll tax income could still support approximately 78% of scheduled benefits2. These benefit reductions will likely impact future generations, rather than those already receiving Social Security benefits. Congress could also provide additional stop-gap funding to ensure current recipients of Social Security do not see a decline in their monthly benefits.
The financial status of Medicare has been holding steady. While tax revenue has been down over the last year, Medicare spent less money since many people have avoided or been unable to obtain elective care during the pandemic. The trust fund for Medicare Part A, which pays for hospital and nursing home costs for seniors, is projected to pay scheduled benefits until 2026, the same year as reported last year2. From there, the trust fund reserves will be depleted, but payroll tax income could still support roughly 91% of scheduled benefits2. If Medicare reduces payments to hospitals due to the shortfall, retirees could experience an increase in out-of-pocket expenses. Therefore, the trustees are urging lawmakers to address the shortfall sooner rather than later.
Social Security recipients may also receive a sizable cost of living adjustment this year. The Senior Citizens League3, a nonpartisan advocacy group, estimates that rising inflation will result in a cost-of-living adjustment of up to 6% for 2022, a significant jump from the 1.3% cost-of-living adjustment for this year. However, some of that may go toward higher costs for Medicare. The Medicare Part B premium for outpatient coverage was projected to rise by $10 per month, which means the total premium would be $158.50 in 2022. The official numbers, however, will not be released until October of 2021.
What is Driving the Projected Funding Shortfall?
These financial challenges are primarily due to demographic changes in the United States. Lower fertility rates and increasing life expectancies are leading to an aging population. The population of Americans ages 65 and older is projected to nearly double from 56 million in 2020 to 95 million by 20604. In percentage terms, this demographic represented 17% of the population in 2020 but is expected to grow to be 23% of the population by 2060. By 2034, older adults will outnumber children for the first time in U.S. history. As a result of these demographic changes, the ratio of beneficiaries-to-workers will continue to rise rapidly, placing further pressure on the financial status of social insurance programs. An aging U.S. population coupled with higher healthcare costs are also contributing to record levels of spending growth for Medicare. Meanwhile, the pandemic has prompted many older workers to take early retirement and forced others out of the labor market altogether. Still, the trustees did not come to a consensus on the long-lasting effects of the pandemic on these programs, given the unprecedented level of uncertainty.
How Might Lawmakers Maintain the Solvency of Social Security and Medicare?
Policymakers have developed a few different proposals to address the solvency problem. These proposals would help to shore up the trust fund reserves and prevent a permanent reduction in benefits. Lawmakers will likely use a combination of these approaches to restore soundness in trust funds and ensure financial security for seniors.
- Boost the Payroll Tax Rate – The current federal payroll tax rate is 12.4% for Social Security and 2.9% for Medicare, or 15.3% total. Paid evenly between employers and employees, this amounts to 7.65% from each. To remain fully solvent over the next 75 years, payroll taxes for Social Security would have to rise by 3.36% to 15.76%2. Likewise, the payroll taxes for Medicare would have to rise by .77% to 3.67%2.
- Raise the Full Retirement Age – Most baby boomers will attain full retirement at age 66 or 67 for those who were born in 1960 or after. Policymakers are considering potentially raising the full retirement age to either 69 or 705.
- Increase or Eliminate the Payroll Tax Cap – In 2021, the earnings limit was $142,800, but each year that figure is adjusted for inflation. Eliminating the taxable maximum would ensure the trust funds remain solvent for more than 40 years6.
It’s important to understand how Social Security and Medicare fit into your overall financial plan.
If you are already receiving Social Security benefits or preparing to apply, you will likely be unaffected by benefits that are reduced in the future. If you have not yet filed, your Aldrich Wealth Advisor can help you explore different filing strategies to determine which would be most suitable given your financial picture, and help you better understand how changes to Social Security and Medicare could impact you.
1 Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. (2020). The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, D.C. https://www.ssa.gov/oact/tr/2020/tr2020.pdf
2 Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. (2021). The 2021 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, D.C. https://www.ssa.gov/oact/TR/2021/tr2021.pdf
3 The Senior Citizens League. (2021). 2022 Social Security COLA Likely to be 6 to 6.1%. Washington, D.C. https://seniorsleague.org/2022-cola/
4 U.S. Census. (2020). Demographic Turning Points for the United States: Population Projections for 2020 to 2060. https://www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1144.pdf
5 Congressional Research Service. (2021). The Social Security Retirement Age. Washington, D.C. https://crsreports.congress.gov/product/pdf/R/R44670
6 Congressional Research Service. (2020). Social Security: Raising or Eliminating the Taxable Earnings Base. Washington, D.C. https://crsreports.congress.gov/product/pdf/RL/RL32896
Tyler Conroy, CFP®
Aldrich Wealth LP
Tyler Conroy joined Aldrich Wealth in 2019. Before joining the firm, Tyler spent several years as an Associate Financial Consultant with Charles Schwab. He has particular expertise in providing comprehensive wealth management and financial planning services. Tyler enjoys educating individuals and families on how to play an active role in their financial well-being. Tyler earned…
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