Trustees Predict That Social Security Will Be Insolvent In 16 Years

Each year, the Trustees for Social Security release an annual report on the financial outlook for Social Security’s Old-Age, Survivors, and Disability Insurance (OASDI) Trust Funds, which outline the current and projected financial status of the trust funds. The key takeaway this year: Both Social Security and Medicare face long-term financing shortfalls.

(You can read the report for 2018, which downloads as a pdf, here.)

Here’s how the programs are funded. Wages and self-employment income are subject to Social Security and Medicare taxes. Together, Social Security and Medicare taxes are known as FICA (Federal Insurance Contributions Act) taxes and are taken right out of your paycheck. Taxes on self-employment income are separately referred to as SECA (Self-Employment Contributions Act) taxes since self-employed persons pay both the employee and employer contributions.

If you’re employed, you pay Social Security tax (6.2%) as the employee, and your employer also pays the same rate of tax (6.2%); again, if you’re self-employed, you pay both portions.

Unlike Medicare, Social Security taxes are subject to a wage cap. In other words, you pay Social Security taxes on your earnings until you hit a magic number. After that, your wages are no longer subject to Social Security taxes. For 2018, that magic number is $128,400. That means that whether you made $1,000 or $100,000, you will pay Social Security taxes on that income. But if you earn $128,401? You’ll pay Social Security taxes on $128,400, but not on the extra dollar. And if you earned $1,128,400? You’ll pay Social Security taxes on $128,400 but not on the extra million.

In contrast, all wages are subject to Medicare taxes. If you’re employed, you pay Medicare tax (1.45%) as the employee, and your employer kicks in tax at the same rate (1.45%) on your total wages. As before, if you’re self-employed, you pay both portions. And, beginning in 2014, high-income taxpayers are also subject to a Medicare surtax (.9%) tacked on to wages which exceed $200,000, or $250,000 for married taxpayers.

Your employer collects those Social Security and Medicare payments and remits them to the government on your behalf (or you pay them directly if you’re self-employed). These taxes are sometimes referred to as "trust fund" taxes and are credited towards your retirement benefits.

The number of credits you need to get retirement benefits depends on when you were born: If you were born in or after 1929, you need 40 credits, or 10 years of work, to collect retirement benefits. The amount of your benefits depends on how much you earned during your lifetime. Remember, while you’re working, you are paying a percentage of your earnings in Social Security taxes, which means that more money (and thus, more tax) should mean more benefits. If you are out of work for some time, or if you earn less money, your benefits should be lower. Overall, benefits typically work out to about 40% of pre-retirement income. As of last quarter, the average monthly check for retired workers, excluding spouses and dependents, totaled $1,411.07 (or $16,932.84 per year).

(For more on your retirement benefits, including how to figure them, you can read the Social Security Administration booklet, which downloads as a pdf, here.)

Some funding for those benefits also comes from income taxes. Once you reach retirement age, you may have to pay income tax your Social Security benefits depending on your filing status and how much other income you receive. If you pay tax on your benefits, it’s added to the pot to be used for other taxpayers.

(For more on whether your Social Security benefits are taxable, click here.)

Even though Social Security focuses on taxes, your benefits are administered not by the IRS but by the Social Security Administration (SSA). The SSA was created in 1935, and the following year, John D. Sweeney, Jr. of New Rochelle, New York received SSN 055-09-0001, the first Social Security record established in the country (interestingly, Sweeney never received any Social Security benefits). Over the program’s 83-year history, it has taken in roughly $20.9 trillion and paid out $18 trillion, leaving asset reserves of $2.9 trillion at the end of 2017 in its trust funds.

Benefits are generally paid out of trust fund collections. Sort of like a bank deposit, your actual contributions don’t sit in a vault somewhere waiting for you to claim them. Instead, your money is used to pay benefits for other taxpayers, and future collections will be used to pay your benefits.

Here’s where it gets tricky. The folks who are entering retirement, and thus collecting Social Security now – the Boomers – represent a large segment of the population. In contrast, the working population is pretty small, and getting smaller: The birth rate in 2017 was the lowest in 30 years. That means that we’re now paying out more than we’re taking in – and it’s going to get worse.

The Trustees report shows that Social Security’s total costs will exceed its total income, including interest, in 2018 for the first time since 1982. The Trustees expect to finance costs using a combination of non-interest income, interest income, and net redemptions of trust fund asset reserves from the General Fund of the Treasury through 2034. That’s when the trust fund reserves will run out.

So what happens then? Without further actions, tax income will only be sufficient to pay about three-quarters of scheduled benefits through 2092. Or put another way, the cost of Social Security benefits expressed as a share of workers’ taxable earnings was 13.7% in 2017, or just a bit over the 12.4% we’re currently collecting. Those costs will increase to roughly 16.8% of earnings in 2039 and will decline slightly before slowly edging up again after 2051. However, the percentage of workers’ taxable earnings isn’t slated to change, so you do the math.

There’s a similar problem with Medicare: Expenses per beneficiary will exceed receipts. Medicare is actually made up of two funds, but most taxpayers think of it in parts:

• Medicare Part A helps cover inpatient care in hospitals, skilled nursing facility, hospice, and home health care. For most taxpayers, Medicare Part A is considered "premium free" since you or your spouse paid into the system while working.
• Medicare Part B is medical insurance and covers services like lab tests, surgeries, and doctor visits and supplies like wheelchairs and walkers which are considered medically necessary to treat a disease or condition. It’s optional coverage, and you have to pay for it if you want it.
• Medicare Part C is almost always referred to as a Medicare Advantage Plan. It’s not a separate benefit but is the part of the policy that allows private health insurance companies to provide Medicare benefits.
• Medicare Part D is prescription drug coverage.

(You can read more about Medicare Part A, B, C, and D here.)

The Trustees project that both Part B and Part D will be more or less adequately financed for the indefinite future because taxpayers pay as they go. However, as the population gets older and health care costs go up, total Medicare costs will increase from 3.7% of GDP in 2017 to 5.8% of GDP by 2038, eventually reaching 6.2% of GDP by 2092. The result? The Trustees anticipate that Medicare will face a substantial financial shortfall.

You already know where this is going. The Trustees suggest that "[l]awmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare" which they should address "as soon as possible." Those options, though unpopular, would include reducing benefits, increasing the age at which folks could qualify for benefits, or boosting the cap for payments to Social Security. Less popular options include means testing to receive benefits, increasing the percentages withheld on wages during employment, or increasing the taxable portion of benefits.

And here’s the scariest part: The Trustees have emphasized the need to make changes now. To make the numbers work, Congress needs to make changes. Considering the recent contentious battles over healthcare and taxes, that doesn’t seem likely. Unfortunately, the longer that Congress waits to act, the more drastic those changes will likely have to be to keep Social Security and Medicare healthy.