#meanstesting

A March 2023 survey found that more than 90% of Americans worry about the Social Security program, and about half of those said they worry a great deal.¹ A separate survey the same month found that more than 80% of Americans worry Medicare will not be able to provide the same level of benefits in the future.²

These concerns are well-founded, because both of these programs — the cornerstones of “America’s Safety Net” — face serious fiscal challenges that require Congressional action. And the longer Congress waits to act, the more extreme the solutions will have to be. Even so, it’s important to keep in mind that neither of these programs is in danger of collapsing completely. The question is what type of changes will be required to rescue them.

Demographic Dilemma

The fundamental problem facing both programs is the aging of the American population. Today’s workers’ pay taxes to fund benefits received by today’s retirees, and with lower birth rates and longer life spans, there are fewer workers paying into the programs and more retirees receiving benefits for a longer period of time. In 1960, there were 5.1 workers for each Social Security beneficiary; in 2023 there are 2.7, dropping steadily to 2.2 by 2045.³

Dwindling Trust Funds

Payroll taxes from today’s workers, along with income taxes on Social Security benefits, go into interest-bearing trust funds. During times when payroll taxes and other income exceeded benefit payments, these funds built up reserve assets. But now the reserves are being depleted as they supplement payroll taxes and other income to meet scheduled benefit payments.

Each year, the Trustees of the Social Security and Medicare Trust Funds provide detailed reports to Congress that track the programs’ current financial condition and projected financial outlook. These reports have warned for years that the trust funds would be depleted in the not-too-distant future, and the most recent reports, both released on March 31, 2023, suggest that the future may arrive even sooner than expected.

Social Security Outlook

Social Security consists of two programs, each with its own trust fund. Retired workers and their families and survivors receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program.

The OASI Trust Fund reserves are projected to be depleted in 2033, one year earlier than in last year’s report, at which time incoming revenue would pay only 77% of scheduled benefits. Reserves in the much smaller DI Trust Fund, which is on stronger footing, are not projected to be depleted during the 75-year period ending 2097.⁴

Under current law, these two trust funds cannot be combined, but the Trustees also provide an estimate for the combined program, referred to as OASDI. This would extend full benefits another year, to 2034, at which time, incoming revenue would pay only 80% of scheduled benefits.⁵

Put simply, the current outlook suggests that Social Security beneficiaries might face a benefit cut of 23% in a decade unless Congress takes action.

Medicare Outlook

Medicare also has two trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care under Medicare Part A. The Supplementary Medical Insurance (SMI) Trust Fund comprises two accounts: one for Medicare Part B physician and outpatient costs and the other for Medicare Part D prescription drug costs.

The HI trust fund reserves are projected to be depleted in 2031. This is three years later than in last year’s report, due to lower costs and higher payroll taxes, but still more imminent than the Social Security shortfall. At that time, revenue would pay only 89% of the program’s costs.⁶

The SMI Trust Fund accounts for Medicare Parts B and D are expected to have sufficient funding because they are automatically balanced through premiums and revenue from the federal government’s general fund, which provides about 75% of costs, a major outlay from the federal budget.⁷

Possible Fixes

The Trustees of both programs continue to urge Congress to address these financial shortfalls soon, so that solutions will be less drastic and may be implemented gradually.

Any permanent fix to Social Security would likely require a combination of changes, including some of these.⁸

• Raise the Social Security payroll tax rate  (currently 12.4%, half paid by the employee and half by the employer). An immediate and permanent payroll tax increase to 15.84% would be necessary to address the long-range revenue shortfall (or to 16.55% if the increase started in 2034).⁹

• Raise the ceiling on wages subject to Social Security payroll taxes ($160,200 in 2023).

• Raise the full retirement age (currently 67 for anyone born in 1960 or later).

• Change the benefit calculation formula.

• Use a different index to calculate the annual cost-of-living adjustment.

• Tax a higher percentage of benefits for higher-income beneficiaries.

Options for reducing the Medicare shortfall include a combination of spending cuts and tax increases. These are some possibilities.¹⁰

• Improve the payment system for Medicare Advantage Plans (private plans that receive partial funding from Medicare).

• Modernize cost sharing between Medicare and Medigap (supplementary insurance).

• Increase the Medicare payroll tax rate  (currently 2.9%, shared equally between employee and employer, with an additional 0.9% on income above $200,000 for single filers and $250,000 for joint filers).¹¹

• Broaden the tax base subject to Medicare payroll taxes (there is no income ceiling for Medicare payroll taxes, but certain income is currently not subject to the tax).

Based on past changes to these programs, it’s likely that any future changes would primarily affect future beneficiaries and have a relatively small effect on those already receiving benefits. While neither Social Security nor Medicare is in danger of disappearing, it would be wise to maintain a strong retirement savings strategy to prepare for potential changes to America’s Safety Net.

Sources:

1) Gallup, April 6, 2023

2) Kaiser Family Foundation, March 2023

3–5, 9) 2023 Social Security Trustees Report

6–7, 11) 2023 Medicare Trustees Report

8) Social Security Administration, February 21, 2023

10) Committee for a Responsible Federal Budget, June 16, 2022

Prepared by Broadridge. Edited by BFSG. Copyright 2023. Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

Social Security isn’t in danger of going broke since it’s financed primarily through payroll taxes, but the financial health of the Social Security trust fund is declining, and benefits may eventually be reduced unless Congress acts. The Social Security Board of Trustees has estimated that its trust fund has reserves to pay all scheduled benefits only until 2033. If Congress fails to act to shore up the system, benefits could be cut indiscriminately by 23%. This would equate to a $420 monthly reduction in the average monthly Social Security check ($1,827) for a retired worker.

The basic problem with the financing of Social Security is one of demography. Beneficiaries are living longer, while low fertility rates mean that fewer people have been entering the labor force over time. If there is a will by Congress to engage in serious discussions, there is a path to putting worries about the long-run viability of the program behind us. It was done before in 1983 with the support of both political parties – Congress enacted changes that fixed about two-thirds of the long-run funding requirements estimated at the time.

Many options have been proposed and combining some of these may help soften the impact of any one solution. For example, the Committee for a Responsible Federal Budget (CRFB) estimates that raising the retirement age by two years to age 69, and then indexing it to longevity, would close 39% of the 75-year funding shortfall. Or the CRFB has estimated that if, instead, all wages were subject to the Social Security payroll tax (instead of the first $160,250 in wages), 63% of the long-run funding gap could be closed. Here is an interactive tool to see how you can fix Social Security.

Tampering with Social Security has always been considered political suicide because of the political clout of seniors, but consider this: those considered Millennials and younger (born after 1980) will outnumber the rest of the older voting population (mostly baby boomers) around the 2028 election and will subsequently get relatively bigger and bigger. With intergenerational inequality at near record highs, Congress may want to stop kicking the can down the road sooner than later.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves Social Security and its benefits. Given Social Security’s importance, concerns about its current and future state are understandable and widespread. We will spend some time debunking some common myths.

Myth: Social Security will provide most of the income you need in retirement.

Fact: It’s likely that Social Security will provide a smaller portion of retirement income than you expect.

There’s no doubt about it — Social Security is an important source of retirement income for most Americans. According to the Social Security Administration (SSA), nearly nine out of ten individuals age 65 and older receive Social Security benefits.¹

But it may be unwise to rely too heavily on Social Security, because to keep the system solvent, some changes will have to be made to it. The younger and wealthier you are, the more likely these changes will affect you. But whether retirement is years away or just around the corner, keep in mind that Social Security was never meant to be the sole source of income for retirees. As President Dwight D. Eisenhower said, “The system is not intended as a substitute for private savings, pension plans, and insurance protection. It is, rather, intended as the foundation upon which these other forms of protection can be soundly built.”

No matter what the future holds for Social Security, focus on saving as much for retirement as possible. When combined with your future Social Security benefits, your retirement savings and pension benefits can help ensure that you’ll have enough income to see you through retirement.

Myth: If you earn money after you retire, you’ll lose your Social Security benefit.

Fact: Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age.

Once you reach full retirement age, you can earn as much as you want without affecting your Social Security retirement benefit. But if you’re under full retirement age, any income that you earn may affect the amount of benefit you receive.

• If you’re under full retirement age, $1 in benefits will be withheld for every $2 you earn above a certain annual limit. For 2022, that limit is $19,560.
• In the year you reach full retirement age, $1 in benefits will be withheld for every $3 you earn above a certain annual limit until the month you reach full retirement age. If you reach full retirement age in 2022, that limit is $51,960.

Even if your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age and omits the months in which your benefit was reduced.

What is Your Full Retirement Age?

*If you were born on January 1 of any year, refer to the previous year to determine your full retirement age.

Myth: Social Security is only a retirement program.

Fact: Social Security also offers disability and survivor benefits.

With all the focus on retirement benefits, it’s easy to overlook the fact that Social Security also offers protection against long-term disability. And when you receive retirement or disability benefits, your family members may be eligible to receive benefits, too.

Another valuable source of support for your family is Social Security survivor insurance. If you were to die, certain members of your family, including your spouse, children, and dependent parents, may be eligible for monthly survivor benefits that can help replace lost income.

For specific information about the benefits, you and your family members may receive, visit the Social Security Administration website at ssa.gov, or call 800-772-1213 if you have questions.

Myth: Social Security benefits are not taxable.

Fact: You may have to pay taxes on your Social Security benefits if you have other income.

If the only income you had during the year was Social Security income, then your benefit generally isn’t taxable. But if you earned income during the year (either from a job or from self-employment) or had substantial investment income, then you might have to pay federal income tax on a portion of your benefit. Up to 85% of your benefit may be taxable, depending on your tax filing status (e.g., single, married filing jointly) and the total amount of income you have.

For more information on this subject, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Myth: Social Security is going bankrupt soon.

Fact: Social Security is facing significant financial challenges but is not going bankrupt.

Social Security is largely a pay-as-you-go system with today’s workers (and employers) paying for today’s retirees through the collection of payroll (FICA) taxes. These taxes and other income are deposited in Social Security trust funds and benefits are paid from them.

According to the SSA, due to demographic factors, Social Security is already paying out more money than it takes in. However, by drawing on the Old-Age and Survivors Insurance (OASI) Trust Fund, the SSA estimates that Social Security should be able to pay 100% of scheduled benefits until fund reserves are depleted in 2033. Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 76% of scheduled benefits. So, at that time, if no changes are made, beneficiaries may receive a benefit that is about 24% less than expected.²

That’s not good news, but Congress still has time to make changes to strengthen the program and address projected shortfalls. Until then, consider various income scenarios when planning for retirement.

Sources:

1) Social Security Administration, Social Security Basic Facts, 2021

2) 2021 OASDI Trustees Report

Prepared by Broadridge Advisor Solutions. Edited by BFSG. Copyright 2022.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.