Social Security Goes Upside-Down
In early June the trustees who run Medicare and Social Security released a report that said that the Medicare program will become insolvent in 2026 and Social Security will face a similar fate in 2034. For the first time in many a decade the combined Social Security trust funds – one for disability, one for retirement, as well as the Medicare hospital insurance trust fund will begin eating into their reserves later this year.
What is the source of the insolvency? Basically we are too healthy – people are living far longer than anticipated when Social Security was created in 1935. The average life expectancy at that time was age 68 for men and 70 for women. Today it’s 79 for men and 82 for women.
If the worst case comes to pass, and the programs truly do become ‘bankrupt’ they won’t actually stop paying benefits. There will still be workers who pay FICA taxes, and even if there is no trust fund, these collected payroll taxes can be transferred, as they are now, to Social Security and Medicare recipients. Based on recent projection the worst case scenario says that there will be roughly an 18% shortfall in 2040, rising to roughly 22% by 2090. Basically, that means that Social Security recipients would have to get by on 82% of the benefits they were expecting in 2040, and 78% if they manage to live all the way out to 2090.
The solutions are fairly straight forward – raise the age people can collect full retirement benefits, marginally raise Social Security taxes, or increase the Social Security tax base (right now only $128,000 of one’s income is taxed by Social Security). None of these solutions will prove to be popular and whether any politician has the intestinal fortitude to tackle these issues remains to be seen. But even if Congress can’t agree on fixes, the world won’t come to an end – Social Security and Medicare recipients will have to tighten their belts a bit.
For those years or decades away from collecting Social Security, boosting one’s retirement savings in anticipation of the above situation may be advisable. If you need help assessing your retirement plan please give us a ring.