Each year, the Trustees of the Social Security and Medicare trust funds provide detailed reports to Congress tracking the programs' financial condition and projected outlook. The latest reports, released on May 6, 2024, continue to highlight significant financial challenges for both programs. Despite these challenges, it is essential to remember that neither program is at risk of total collapse. The key question is what changes will be necessary to sustain them.
Demographic Shifts: More Retirees and Fewer Workers
The primary issue facing Social Security and Medicare is the aging American population. Lower birth rates and longer life spans mean there are fewer workers paying into these programs and more retirees drawing benefits for a longer period. In 1960, there were 5.1 workers per Social Security beneficiary; by 2024, this number has dropped to 2.7 and is projected to decline further to 2.3 by 2040.
Depletion of Trust Funds
Payroll taxes from current workers and income taxes on Social Security benefits contribute to interest-bearing trust funds. Historically, these funds built reserves when income exceeded benefit payments. However, these reserves are now being depleted to cover the gap between income and scheduled benefit payments.
Social Security Outlook
Social Security includes two programs, each with its own trust fund:
- Old-Age and Survivors Insurance (OASI): Provides monthly benefits to retired workers, their families, and survivors.
- Disability Insurance (DI): Provides monthly benefits to disabled workers and their families.
The OASI Trust Fund reserves are projected to be depleted by 2033, at which point incoming revenue will only cover 79% of scheduled benefits. The DI Trust Fund, in contrast, is not projected to be depleted within the 75-year forecast period ending in 2098.
The Trustees also provide projections for a hypothetical combined OASDI program. This combined program would extend full benefits until 2035, after which incoming revenue would cover 83% of scheduled benefits.
Medicare Outlook
Medicare consists of two trust funds:
- Hospital Insurance (HI) Trust Fund: Pays for inpatient and hospital care under Medicare Part A. The HI Trust Fund is projected to contain surplus income until 2029 but will be depleted by 2036, with revenue only covering 89% of costs thereafter.
- Supplementary Medical Insurance (SMI) Trust Fund: Covers Medicare Part B (physician and outpatient costs) and Part D (prescription drug costs). The SMI Trust Fund is expected to remain adequately funded through premiums and federal revenue, but financing needs will grow faster than the economy to cover rising expenditures.
Potential Solutions
Without congressional action, Social Security beneficiaries could face benefit cuts once the trust funds are depleted. Addressing the shortfall will likely require a combination of the following changes:
- Increase Social Security Payroll Tax Rate: Raising the payroll tax rate from the current 12.4% to 15.73% immediately and permanently could address the long-term revenue shortfall. If delayed until 2035, the rate might need to rise to 16.42%.
- Raise the Wage Ceiling Subject to Payroll Taxes: Currently, wages up to $168,600 are subject to Social Security taxes.
- Increase Full Retirement Age: Raising the retirement age from 67 for those born in 1960 or later.
Adjust Benefit Calculation Formula: Modifying how benefits are calculated. - Change Cost-of-Living Adjustment Index: Using a different index for annual benefit adjustments.
- Increase Taxation on Benefits for Higher-Income Beneficiaries: Taxing a larger percentage of Social Security benefits for higher-income retirees.
Preparing for the Future
While neither Social Security nor Medicare is at risk of disappearing, it is prudent to maintain a robust retirement savings strategy. Future changes will likely affect new beneficiaries more than current ones. Staying informed and planning ahead can help mitigate the impact of potential benefit adjustments.
For more details, you can view a combined summary of the 2024 Social Security and Medicare Trustees Reports, along with the full Social Security report at ssa.gov. The full Medicare report is available at cms.gov.
