It’s hard to follow the news without seeing almost daily discussion of Social Security and Medicare, and how viable these bedrocks of retirement planning will be in the future. The challenges are obvious. Relatively fewer working people every year are paying into the funds that support a steadily growing number of retirees. The math is clear: sooner or later there won’t be enough money.
Not so obvious: just how serious this problem is, and what’s the best way to solve it.
In April 2019, the trustees of the Social Security and Medicare trust funds issued a report on the current status, likely prospects and potential changes to these all-important programs.
The short-term news is that in 2020 the cost of paying Social Security benefits – to retirees, survivors and the disabled – will exceed the amount of money coming in from taxes. That annual deficit will continue, and grow, for at least the next 75 years. But that doesn’t mean Social Security is “running out of money.” Not yet, anyway.
What it does mean is that the government will have to start drawing on the trust fund’s reserves. It’s something like how a family with expenses exceeding its income may have to draw on its savings. But like a savings account, the trust fund isn’t infinite. Eventually, it will be used up. Unless Congress makes changes in how taxes or benefits work, that will happen in 2035. Because of recent improvement in the economy, that happens to be a year later than what the trustees predicted in their 2018 report.
The worst-case scenario – again assuming nothing changes – is that payroll taxes will be enough to cover only 80 percent of benefits in 2035, then gradually dwindling to 75 percent by 2093.
One important technicality is that Social Security actually has two trust funds, one for retirement and one for disability. If the disability “pot” is considered separately, it would not be empty until 2052. That date is a full two decades later than the trustees predicted just a year ago, based on a decline in the number of disabled workers drawing benefits or applying for new benefits. After 2052, payroll taxes should be sufficient to pay 91 percent of the government’s disability obligations.
Medicare, which provides health coverage for retirees and some people with disabilities, has been teetering back and forth between deficit and surplus for a number of years. Medicare paid out more than it took in from 2008 through 2015, ran surpluses in 2016 and 2017, but was back in the red in 2018, a trend that’s expected to continue. Medicare’s main trust fund is expected to be used up by 2026, after which tax revenue would cover 89 percent of benefit costs, diminishing to 78 percent by 2043 but then rising again to 83 percent by 2092.
The curve in that chart is far less reliable than the projections for Social Security. As everybody who pays for medical care knows, costs have been rising steadily, and Medicare is certainly not immune to those pressures. That’s why Medicare’s trustees caution that their projections “are highly uncertain.”
Clearly, something will have to be done, and should be done soon. But what? A badly divided Congress has shown little appetite for tackling this tricky problem, which has been called “the third rail of politics.” Referring to the high-voltage power source for subway trains, the label means “you touch it and you die,” politically at least.
But our lawmakers understand that if they don’t touch these retirement benefits, actual people – their retired constituents – may literally die, or at least find themselves hurting financially and medically.
Some of the proposed solutions, as the trustees’ reports summarize, are:
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