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What does the depletion of the Trust Fund to Pay Benefits Mean?
By Jon Aldrich
We have been aware for the last couple of decades that there would be a funding crisis in Social Security and Medicare in the early to mid 2030’s if we continued on the current path and nothing is done to shore up the reserves. We have heard and seen the reports and it always seemed like it was so far away, that it really wouldn’t be a problem.
Well, the latest report from Social Security pushed the anticipated day that the Social Security Trust Fund will be depleted up a year to 2033 due to the challenging economic conditions and high inflation of the last year and a half. Hello! That is only 10 years away! Medicare will start having issues by 2031. So, if you have not been paying much attention to this before, you probably want to start paying a little more attention to it now. Here are a couple of bullet points from the report recently issued from the Social Security Administration: (Source: www.ssa.gov)
Based on our best estimates, this year's reports show that:
• The Hospital Insurance (HI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2031, three years later than reported last year. At that point, the fund's reserves will become depleted and continuing program income will be sufficient to pay 89 percent of total scheduled benefits.
• The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, one year earlier than reported last year. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 77 percent of scheduled benefits.
• The Disability Insurance (DI) Trust Fund is projected to be able to pay 100 percent of total scheduled benefits through at least 2097, the last year of this report's projection period. By comparison, last year's report projected that the DI Trust Fund would be able to pay scheduled benefits through at least 2096, the last year of that report's projection period.
• If the OASI Trust Fund and the DI Trust Fund projections are added together, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2034, one year earlier than reported last year. At that time, the projected fund's reserves will become depleted and continuing total fund income will be sufficient to pay 80 percent of scheduled benefits. (The two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.)
The following chart summarizes the trust fund reserves for HI (Hospital Insurance-Medicare), OASI (Social Security) and DI (Social Security Disability Insurance).
This all sounds rather dire, but let’s step back for a second and break this down and try to answer some questions that many people will have:
- Will Social Security Disappear? – No -If nothing is done, the approximate reduction in benefits would be 25%. The trust fund may be exhausted, but the bulk of monthly Social Security benefits are covered by payroll taxes from those working. Every year, about 75% of the benefits are covered by current workers and the remaining 25% covered by the trust fund reserves. Thus, if you are receiving $30,000 a year in benefits in today’s dollars, that could drop to $22,500 in 2033. This now becomes another planning risk to discuss in addition to market, inflation, and sequence of returns risk.
- What could be done to avoid this? – Well, first our divided political system would have to come up with some kind of compromise to find ways to bring in more money. This could include raising taxes, raising the retirement age, or possibly borrowing money. However, the longer they continue to ride towards the cliff, the harder the solutions become and the more financial impact the changes needed to be made would affect people. Borrowing money would be unsustainable since the country is already saddled with debt, so it probably comes down to raising taxes (this could be done in various ways) and the retirement age or some combination of both.
- Are there any other ideas to solve this? - There have also been other ideas to raise funds for Social Security such as a “carbon” tax on emissions or a financial transaction tax on stock transactions which would primarily affect hedge funds and other “High Frequency Traders”. They could also possibly adjust the annual Cost of Living Adjustments (COLA) and use a different index or methodology to calculate. Another solution could be to increase the wage base for which workers contribute to Social Security. For 2023, this limit is $160,200, above which no Social Security taxes are collected. This limit increases each year with inflation.
- What are some things that can be done to plan for potential cuts? Of course, everyone’s financial plan is different, but delaying claiming Social Security is certainly one thing that can be done, as a cut from a larger benefit still leaves more potential income than the same percentage cut from a lower monthly benefit. Other things that can be done could be:
- Working longer or part-time work
- Saving more
- Utilize an income annuity to generate additional guaranteed income
- Adjust spending in retirement.
- Is Medicare in trouble as well? Yes, to a certain extent. Since Medicare works a little differently than Social Security, there would not be a cut to benefits to individuals, per se, since the money gets paid directly to doctors, hospitals and medical care providers, but they would all get a cut in what they receive for reimbursements. Does this mean services for medical care increase in cost, will fewer treatments be covered, will more providers just stop accepting Medicare? The answer could be yes to all these questions. Only time will tell. The anticipated reduction in Medicare benefits is 11%.
- What about Claiming Social Security Benefits Early if we are going to be facing cuts in benefits in a decade? Probably not, unless Congress was going to do something that totally changes the benefits in an adverse way. The benefits of delaying Social Security are still too good in most cases (not all). Delaying benefits increases the total monthly benefit for life, so after any potential benefit cuts you will still receive more monthly income by delaying if you are in a financial position to do so.
If you are concerned about the possible reduction in Social Security benefits, it is probably a good idea to model how future potential Social Security cuts may affect your financial and retirement plan. A good planner will be able to quickly model in their financial planning software what these cuts may look like in your personal situation and help you plan accordingly.
I really bet if Congress didn’t have their own pension for those that have at least 5 years of service, and relied more on Social Security like the majority of the country does, the problem would have been solved years ago. Right now, no party wants to be the “villain” of introducing the tough choices that need to be made to avoid future benefit cuts, but this certainly will have to be done sometime and the longer they wait, the more pain there will be. Of course, let’s remember Congress unofficial slogan “Keep kicking the can down the road”.