Social Security Going Upside Down
One topic that hasn’t been discussed much in the current presidential race is the fact that Social Security’s costs are expected to exceed its income in 2020 for the first time since 1982; in other words, Social Security will be upside down. This will force the program to dip into its nearly $3 trillion trust fund to cover benefits. By 2035, the trust funds for both Medicare and Social Security will be depleted and will no longer be able to pay its full scheduled benefits. At that time Social Security recipients will get only about three-quarters of their scheduled benefits.
The problem is the costs of both Medicare and Social Security are projected to soar as a wave of retiring baby boomers increases the number of program beneficiaries, and lower birthrates over the past few decades reduce the number of people paying into the programs. Rising Social Security and Medicare costs are also expected to weigh on the federal budget. Today both programs together account for 45% of federal spending, excluding interest payments on the national debt, and have contributed to larger deficits that are set to exceed $1 trillion a year starting in 2020.
Social Security was forced to dip into its trust fund in the 1980s, as a result Congress responded with bipartisan measures to improve the program’s financial footing. These measures included raising payroll-tax collections, delaying cost-of-living adjustments, slowly increasing the full retirement benefit age, and subjecting up to one half of one’s Social Security benefit to taxation.
Social Security consists of two programs, one for retirees and one for people who claim disability benefits. In 2018 approximately 52.7 million people received Social Security retirement and survivor benefits, 10.2 million received disability benefits, and 59.9 million were covered under Medicare. Taken separately, the retirement program will be able to pay full benefits on a timely basis until 2034. The disability fund is now expected to run out in 2052, 20 years later than projected in previously. The report also said Medicare’s hospital-insurance fund would be depleted in 2026 as lower payroll-tax collections and reduced income from the taxation of Social Security benefits weighed on the trust fund’s income. In 2019, the combined cost of the Social Security and Medicare programs are estimated to equal 8.7% of GDP, before rising to 11.6% by 2035.
Most of the increase is attributable to Medicare as annual Medicare costs are now about 76% of the cost of Social Security. The program is expected to eclipse Social Security by 2040, despite health-care costs growing more slowly over the past decade. The latest projections suggest the problem could affect not only future retirees, but also current ones. Today’s newest retirees will be 72 when Medicare’s hospital trust fund is depleted, and 78 when the Social Security retiree trust fund runs out.
Medicare and Social Security are popular among voters. While lawmakers generally recognize the programs are driving higher deficits, they have been unable to agree on changes to improve their fiscal health. President Trump vowed during the 2016 campaign not to touch entitlements, providing little incentive for Republicans to push for such changes. One Congressional proposal would close the Social Security revenue gap by gradually increasing the payroll tax rate and eliminating the payroll tax cap. Currently, employees pay 6.2% payroll tax—matched by employers—on income up to nearly $133,000. Republicans in the past have put forward proposals to reduce benefits to ensure the program remains solvent, but those haven’t gained widespread support and are unlikely to advance in an election year.
Which leaves many citizens contemplating how does one plan for retirement when Social Security’s future financial health is such an unknown? Perhaps working until Full Retirement Age, 67 for any born after 1960, and planning to receive about 75% of one’s expected benefit is a solution for now, until Washington gets its act together. If you need assistance evaluating your Social Security benefit and how it may figure in your retirement plan please navigate to: https://resolutefinancial.com/contact-us/ , and start a conversation with our fee-only financial planners at Resolute Financial.