Social Security and Medicare Funding: Is the Sky Falling?

An older man sitting on his sofa looks concerned. — (Image credit: Getty Images)

Since their creation in 1935 and 1965, respectively, Social Security and Medicare have become pillars of the country’s financial safety net for elderly citizens. Millions of retirees rely on Social Security for income after they’re no longer working, and on Medicare to help them stay healthy throughout their retirement.

Many now worry the entitlement programs they’re counting on for retirement won’t be available to them. Talk of Social Security’s underlying trust fund exhaustion by 2033 and Medicare’s by 2036 is alarming. At just over 10 years away, many current and future retirees are left wondering if there will be any Social Security or Medicare benefits left when they need them most.

Entitlement funding: More than trust funds

I find that alarm bells frequently get rung unnecessarily. These programs are not going bankrupt: You will still receive Social Security and Medicare benefits because they will not cease to exist simply because their respective trust funds become insolvent. In addition to being funded by those trust funds, these programs also receive funding from taxes levied on working Americans.

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A close examination of your pay stub will reveal that in 2024 you paid 6.2% of your wages in Social Security tax for any income below $168,600 (a limit that jumps to $176,100 in 2025). Similarly, 1.4% of your earnings are used to fund Medicare. If you’re fortunate enough to be classified as a high earner — meaning $200,000 for individuals and $250,000 for married couples who file jointly — an extra 0.9% Medicare tax is applied to your earnings as well.

What your pay stub may not show is that your employer also pays Social Security and Medicare taxes on your wages — generally the same amount you pay. Combined, these taxes contribute a large amount of income for these programs: In 2023, Social Security’s trust fund earned $1.233 trillion from payroll taxes alone. Similarly, Medicare’s trust brought in $367.2 billion.

This means that even if the trust funds were to be depleted entirely, Social Security and Medicare benefit recipients would continue to receive benefits. However, those benefits would be reduced.

Without a trust fund to supplement its expenditures, current estimates show that Social Security can pay benefits at 79% of its current level. If that happened, the average Social Security recipient, receiving $1,925.46 per month as of November 2024, would instead get $1,521.11. That decrease would not be nearly as disastrous as the often-feared disappearance of Social Security entirely.

Nonetheless, taking a $404-a-month pay cut in retirement would be unpleasant. The good news is, it’s entirely preventable. There are a couple of ways Social Security’s trust fund could be shored up to remain solvent indefinitely:

1. Raise the age

One that has already been enacted in the past, and could be again in the future, is to raise the age at which retirees are eligible to receive full Social Security benefits. Currently, new recipients must be 67 to reach their full retirement age and receive their full benefit — an increase from the previous age of 65.

Raising that age to 70 or beyond could reduce Social Security’s obligations by billions of dollars. However, that option is likely to be unpopular with people who wish to retire and pursue their interests when they turn 65 or 67. Because of this, some advocate for other options that would cost taxpayers more but allow them to retire “on time.”

2. Raise the tax

Perhaps the most obvious is an adjustment of the Social Security payroll tax: by increasing the amount collected from employees and employers, the Social Security trust fund could be sustained indefinitely — or at least until taxpayers object to the increased taxation.

Similarly, the government could address the problem by raising the cap on the Social Security payroll tax. Currently, the Social Security tax does not apply to earnings above $168,600 (or $176,100 starting in 2025). Someone making that annual salary currently pays the same amount in Social Security taxes as someone earning $1 million per year. That leaves a large, untapped potential revenue source for Social Security.

There are a number of proposals to eliminate the cap entirely, or create a “gap cap” in which income above $168,600 is not taxed until it crosses a higher threshold, such as $400,000, at which point income above that threshold would once again be taxed.

That would improve Social Security’s financial situation, but high-earning taxpayers would likely disapprove, especially considering many of these proposals do not suggest a similar increase in benefits for retirees who were high earners in their careers.

There are many levers the government can pull to improve, or fix entirely, the Social Security solvency problem. However, as I often remark, Social Security is not considered the “third rail of American politics” for nothing! Any changes to Social Security — whether to its benefits or its taxes — are likely to at least temporarily upset voters, which is something few politicians are eager to do.

Medicare fixes have similar pros and cons, which, like Social Security, boil down to government action or inaction. Something likely will be done to fix them, but it may not come until the deadline is at our doorstep.

The bottom line

Even without a fix, these programs will still exist regardless of the health of their trust funds, and even a reduced benefit schedule is more valuable to retirees than no benefits at all. That said, for retirement planning purposes it’s wise to assume reduced or eliminated benefits for your retirement and plan accordingly. Anticipating the worst-case scenario means that, should it not occur, you will have more money available to you in retirement than you planned for. That’s never a bad thing!

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jared Elson is a Series 65 Licensed Investment Adviser Representative (IAR) and the CEO of Authentikos Advisory. Following a 10-year career with Yahoo, Jared identified an acute need for sound financial counsel in the tech industry and has excelled in giving tech professionals the tools they need to grow and preserve their wealth.