There’s good news and bad news regarding the trust funds for Social Security and Medicare. But before we give you the details, you should know that no matter how bad the news, neither program is expected to completely stop paying benefits, no matter when the trust funds run dry. Rather, at least a portion of promised benefits will be paid by new tax levies.
How long will the trust funds help pay benefits?
First, a bit of good news: The hospital insurance fund for Medicare Part A is expected to be able to fully pay scheduled benefits until 2031, three years longer than last year’s projection, according to a recently released report. When the trust fund is depleted, program tax income is expected to be sufficient to pay 89% of projected benefits.
The Disability Insurance Trust Fund is in better shape. That fund is projected to be able to pay 100% of scheduled benefits through at least 2097, which is as far out as the report projects. In other words, it’s not expected to run out of money at all. This is an extension of last year’s projection, which also didn’t predict the fund running out of money before 2096, the last year of that report’s prediction period.
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Now for the not-so-good: The Old-Age and Survivors Insurance Trust Fund that pays Social Security retiree benefits is projected to run out in 2033, which is a year earlier than was projected last year. At that point, the fund's continuing income is expected to fund just 77% of scheduled benefits
What made the projections change?
Trustees for Social Security revised their projections based on updated data on inflation and economic output. They revised down their projected levels of gross domestic product and labor productivity by about 3%, accounting for data on inflation and U.S. economic output.
The hospital insurance fund projection improved because of lower projected health-care spending that analysts said stemmed from more recent data.
According to the Center on Budget and Policy Priorities, under a bipartisan Social Security financing deal in 1983, Social Security ran a surplus every year until 2021. Then in 2021, Social Security’s total cost exceeded its total income.
The trust funds’ reserves supplement the program’s income — from payroll taxes, income taxes on benefits paid to higher-income beneficiaries, and interest earned on the trust funds’ bonds — allowing Social Security to keep paying full benefits until the reserves are depleted.
Contrary to the fears of some, benefits will not cease if Social Security’s trust funds run out of Treasury bonds to cash in. Money from income taxes would enable Social Security to continue paying about 80% of benefits.
Why are the funds inadequate?
According to the Bipartisan Policy Center, a big reason for the coming Social Security shortfall is demographics. There are fewer younger people paying taxes to support retirees. The ratio of workers paying Social Security payroll taxes to people drawing benefits has dropped from four-to-one in 1965 to just under three-to-one in 2022.
Another issue, according to the center, has to do with income disparities and the cap on the amount of income that is taxed for Social Security. As the center describes it, Social Security’s payroll tax, which covered 90% of total earnings in 1983, is projected to cover just 80% this year. This is because the income of top earners has grown much faster than that of lower earners, placing more earnings above the taxable cap of $160,000 this year.
Proposals to bolster the trust fund and save Social Security range from increasing taxes on higher-income earners to raising the retirement age.
Note: A version of this item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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