#socialsecurity

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.

Find out during our free webinar on July 13^th from 10-11:30am PT. Social Security expert Elaine Simmons will share knowledge from her near 50-year career helping people make informed decisions regarding this significant retirement asset. Register today and take control of your retirement.

By:  Michael Allbee, CFP®, Senior Portfolio Manager

Last week, we tackled one of America’s largest mandatory spending programs, Social Security (forecasted to account for 21% of total government spending in 2023) and answered the question, Is Social Security on life support? However, did you know Medicare and Medicaid are projected to account for 26% of total government spending in 2023? Together, Social Security and Medicare programs will be responsible for nearly 80% of the deficit’s rise between 2023 and 2032, according to Congressional Budget Office (CBO) projections.

Absent any reforms, Medicare’s Hospital Insurance Trust Fund will be insolvent by 2031, two years before the insolvency of Social Security (2033). If this were to happen, Medicare hospital insurance payments would be cut by more than 10%. The 2023 Trustees Report shows that a significant payroll tax hike of 4.2% would be required to close the current funding gap for Social Security’s Old Age, Survivors, and Disability Insurance (OASDI) and Medicare.

Just as with Social Security, many options have been proposed and combining some of these may help soften the impact of any one solution to solve the funding of Medicare. For too long politicians on both sides of the aisle have chosen to ignore the problem. The risks to our economy will only continue to grow the longer we wait to address them.

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.

By:  Tina Schackman, CFA®, CFP®, Senior Retirement Plan Consultant

With approximately 94% of American workers covered by Social Security and 65.2 million people currently receiving benefits, keeping Social Security healthy is a major concern.¹ 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.

This could be a reason so many U.S. workers are asking whether they should take Social Security benefits as soon as they turn 62. In fact, in 2021, 25% of men and 27% of women filed for their Social Security benefits when they turned 62, but is this the right strategy for you? Well, it depends on your specific situation. There are many variables that can help or hurt your outcomes when it comes to maximizing your benefit. Let’s walk through a sample client to illustrate a specific Social Security filing recommendation. 

The graph below shows the percentage of the FRA benefit you will receive, but it’s important to note there can be adjustments if you have earned income while claiming your Social Security benefits.

Another question that came up in this example was if John could invest his Social Security benefits into an IRA or Roth IRA. Because Social Security benefits are not considered earned income, they cannot be used to make contributions into your IRA accounts; however, John and Sally can both make contributions into their IRA accounts with their earned income. 

Everyone’s situation is going to be different, especially when there is a spouse involved, so it’s best to speak with an advisor or call the Social Security Administration office to understand your options. And we highly encourage you to do this well in advance of turning age 62 so you can have a well-thought-out strategy for your retirement. 

Footnotes:

1. Source: www.ssa.gov (December 2021)

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.