In early September, the Social Security and Medicare Trustees released their annual report on the health of these programs.  According to the report, Social Security will have to cut benefits by 2034 if Congress does not address the long-term funding shortfall.  This shortfall is expected to occur one year earlier than had been reported last year.  This doesn’t mean that Social Security will run out of money and cease payments to all recipients.  However, this does mean that in 2034 the trust fund for Social Security will be depleted and the revenue from payroll taxes alone will only be able to cover 78% of expected benefits to retirees.  The disability fund is in better shape than the retirement fund and is expected to last until 2057, with only 91% of benefits to be payable at that time.  Keep in mind that Social Security has been deficit spending for some time now.  In 2021 alone, it is expected that there will be a shortfall between payroll taxes collected and benefits paid of approximately $147 billion.  This annual shortfall is why the trust fund has been shrinking and will eventually be depleted.

No surprise, the COVID-19 pandemic and economic downturn of 2020 are behind these pessimistic projections.  The large drop in employment (millions of jobs lost) significantly impacted revenue collected from payroll taxes.  The trustees also projected a higher mortality rate through 2023 and a delay in births in the near term.  However, the report did not consider the other effects of the pandemic such as in increase in deaths among the oldest of recipients.  Thankfully, employment this year has strongly rebounded compared to last year. It is possible that in the coming year we will see a reversal of what was reported in 2021.

The report also concluded that projections for Medicare did not change much from the prior year.  It is expected that the trust fund for Medicare Part A, which covers hospital and nursing home costs, will be depleted in 2026 when only 91% of benefits are expected to be covered.  Medicare Part B, which helps to cover costs related to doctors’ visits and outpatient care, along with Part D, which covers prescription drug benefits, are “adequately financed into the indefinite future”.   The difference between Part A and the others is that the law requires automatic financing for Part B & D, but does not for Part A. The scope of both programs is significant with 65 million people receiving Social Security benefits and nearly 63 million receiving Medicare coverage.

As you might expect, the trustees recommended that lawmakers act soon to address the long-term shortfalls, but, as we all know, Congress likes to procrastinate.  You might ask, what can be done?  Congress could raise payroll taxes or benefits could be reduced or they could enact a combination of the two.  A reduction in benefits could involve raising the eligibility age.  Benefits would be reduced long-term because people could not collect them as soon. Further, an increase in taxes could be achieved by raising the cap on wages that are subject to payroll taxes.  In 2021, the earnings cap was $142,800, which means that any income earned above $142,800 is not subject to payroll taxes.

Increasing payroll taxes today by roughly 3.5% would ensure solvency of the program for another 75 years. The other alternative would be a 21% cut in benefits today.  Neither of these options to fix Social Security and Medicare funding will be popular or politically easy to accomplish, but eventually, Congress will need to act.  I suspect it will be more politically advantageous to raise payroll taxes (split between employees and employers) than to reduce benefits to those in retirement, but only time will tell.  My suspicion is that Congress will delay acting as long as they can and will do something only when forced to by their constituents.  At the end of the day, the only power we have to compel politicians to tackle this issue is elections.