Every year, the Trustees of the Social Security and Medicare Trust Funds release reports to Congress on the programs’ financial condition and projected financial outlook. The newest reports discuss the challenges and project a Social Security cost-of-living adjustment (COLA) of 2.2% for 2018.
Why are they facing financial challenges?
Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on the trust funds is also worsening as large numbers reach retirement age and live longer, and as health-care costs rise.
How to address these challenges?
Both urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining solutions may also lessen the impact of any one effort.
Some long-term Social Security proposals on the table are:
- Raising the current Social Security payroll tax rate. According to this year’s report, an immediate and permanent payroll tax increase of 2.76 percentage points would be necessary to address the long-range revenue shortfall (3.98 percentage points if the increase started in 2034).
- Raising the ceiling on wages subject to Social Security payroll taxes (which was $127,200 in 2017).
- Raising the full retirement age beyond the current 67 (for anyone born in 1960 or later).
- Reducing future benefits. Scheduled benefits would have to be reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2017 or later, the report said.
- Changing the benefit formula to calculate benefits.
- Calculating the annual cost-of-living adjustment for benefits differently.
According to the Medicare Trustees Report, to keep the HI Trust Fund solvent for the long-term (75 years), the current 2.90% payroll tax would need to be increased immediately to 3.54% or expenditures reduced immediately by 14%. Alternatively, other tax or benefit changes could be implemented gradually and might be even more drastic.
What are the Social Security and Medicare Trust Funds?
Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a trust fund that holds Social Security payroll taxes collected to pay benefits. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have reserves that could be used to cover benefit obligations if payroll tax income was insufficient to pay full benefits.
Medicare: There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund has two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).
Trustees Report highlights: Social Security
- The combined trust fund reserves (OASDI) are still increasing, but are growing more slowly than costs. The U.S. Treasury will need to start withdrawing from reserves to help pay benefits in 2022, when annual program costs are projected to exceed total income. The Trustees project that the combined trust fund reserves will be depleted in 2034, the same year projected in last year’s report, unless Congress acts.
Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits for 2034, with the percentage falling gradually to 73% by 2091.
- The OASI Trust Fund, considered separately, is projected to be depleted in 2035, the same year projected in last year’s report. Payroll tax revenue alone would then be sufficient to pay 75% of scheduled OASI benefits.
- The DI Trust Fund is expected to be depleted in 2028, five years later than projected in last year’s report. Both benefit applications and the total number of disabled workers currently receiving benefits have been declining. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 93% of scheduled benefits.
- Based on the assumptions in this year’s report, the Social Security Administration is projecting that beneficiaries will receive a cost-of-living adjustment (COLA) of 2.2% for 2018.
Trustees Report highlights: Medicare
- Annual costs for the Medicare program exceeded tax income annually from 2008 to 2015. The Trustees project surpluses in 2016 through 2022 and a return to deficits thereafter.
- The HI Trust Fund is projected to be depleted in 2029, one year later than projected last year. Once the HI Trust Fund is depleted, tax and premium income would still cover 88% of estimated program costs, declining to 81% by 2050, and then gradually increasing to 88% by 2091. The Trustees note that long-range projections of Medicare costs are highly uncertain.