A Sorry State

The latest report on the solvency of the Social Security Trust Fund was recently released by the Social Security Administration. Another year has passed, which means another year less until the trust fund will be depleted (in other words, projections still show that depletion will occur by 2034). Neither Social Security nor Medicare have been mentioned as issues on the current administration’s political agenda, so unfortunately the time to find a well-vetted solution continues to tick away, until there will be no choice but mandatory benefit cuts.

The trustees project that the combined asset reserves for Old-Age and Survivors Insurance and Disability Insurance Trust Funds will be depleted in just 17 years.

These funds receive, hold and invest the Social Security taxes workers and employers pay. The funds are also used to make retirement, survivor and disability payments to approximately 61 million Americans.   

In their report to Congress, the trustees said assets totaled approximately $2.85 trillion in 2016, an increase of $35 billion from the prior year. Although the funds are expected to grow for the next few years, beginning in 2022 the trustees foresee annual benefits paid out will exceed the Social Security taxes workers and employers pay. If Congress doesn't act before 2034, trust fund assets will be depleted, and the taxes workers and employers pay would be enough to cover only about 77 percent of scheduled benefits.

The reason is demographics: a rapidly growing number of baby boomer retirees, increases in life expectancy and lower birth rates. When Social Security was first established in 1935, a retiree aged 65 would live to age 77 on average. Today, that 65-year-old will live to at least 85. In 1950, 16 workers paid Social Security taxes for every person collecting benefits. Today, that ratio has shrunk to 3.3 to one, and by 2034, it's projected to be as little as two to one.

To head off the coming day of reckoning, Congress will need to consider several potential solutions. They could include increasing the payroll tax workers and their employers pay into Social Security, cutting benefits to younger workers who have more time to plan for retirement and increasing the amount of Social Security benefits that are taxable for higher-income retirees. 

Chances are that any solution would include some combination of all three.

While it remains to be seen if Congress will actually act, individuals need to think about what must be done now to soften the impact of a future that's likely to have less in the way of Social Security benefits.

For example, younger workers today may have to wait until age 70 or older to collect Social Security benefits (if they can collect at all), which means they'll need to save more for retirement. That makes it even more important for them to make the most of contributing to tax-advantaged retirement savings accounts, including 401(k) plans, IRAs and health savings accounts. For those close to or in retirement, the potential for reduction in benefits must be addressed in your planning. Though there is a 17-year window, and a lot can happen between now and then, forewarned is forearmed.

The annual report also updated information on the state of Medicare’s finances.

In terms of Medicare, the trustees project that the trust fund for Part A, which covers hospital costs for seniors, will run dry by 2029. That's one year earlier than they projected last year, due to lower-than-expected payroll taxes and a slower-than-estimated rate of reduction in inpatient use of hospital services.

But the exhaustion date is still 11 years later than had been projected before Congress passed the Affordable Care Act, known as Obamacare, in 2010.

By 2029, Medicare Part A would only be able to pay out 88% of expected benefits -- a figure that would fall to 81% by 2041 before gradually increasing to 88% by 2091.

Meanwhile, Medicare Part B, which helps seniors pay for doctor's bills and outpatient expenses, is funded by a combination of premium payments and money from general federal revenue. The same is true of Part D, which offers prescription drug coverage. Both will be financed in full indefinitely, but only because the law requires automatic financing of them.

But their costs are growing quickly. The trustees estimate that the costs will grow to 3.4% of GDP by 2037.