Neither pay cuts nor law reforms, your retirement may be non-existent if you were born after 1980

The Trustees of the Social Security and Medicare trust funds have released their latest annual report on the health of the reserves that help pay for a portion of each program’s benefits. Higher costs both for health care and a payout of additional Social Security benefits have contributed to the trustees moving up the date when the trust funds will run out of money.

Without action by Congress to shore up the programs, the Old-Age and Survivors Insurance (OASI) trust fund will still become insolvent in 2033, but about 3 calendar quarters earlier. When combined with the trust fund for Disability Insurance, the go-broke date is 2034, a year earlier than stated in last year’s report.

The Hospital Insurance Trust Fund, which covers Medicare, will only be able to pay 100% of total scheduled benefits until 2033. That is three years earlier than what was reported last year.

While neither payments nor benefits will dry up after the trust funds become insolvent, they will be curtailed, only able to rely on the income from payroll taxes. The trustees said in the report that revenues will be able to cover 89% of Medicare benefits but only 77% of total scheduled Social Security benefits.

Factors that contributed to advanced insolvency date

The Trustees of the Social Security and Medicare trust funds cited three factors that advanced the insolvency date for the Old-Age and Survivors Insurance trust fund.

Firstly, the enactment of the Social Security Fairness Act in January this year, which repealed the Windfall Elimination and Government Pension Offset provisions, was the primary contributor. SSA says that 97% of the 2.8 million beneficiaries that were affected have had their benefits adjusted, some received an increase of over $1,000 per month, as of publication.

They also pushed back the assumed period of recovery from historically low levels of fertility by 10 years from 2040 to 2050. As well, they lowered the assumed long-term share of Gross Domestic Product that accrues to workers in the form of labor compensation.

As for Medicare, the primary reason was an upward revision in expected expenditures in the near term. Last year’s expenditures were higher than what was anticipated, which in turn increased the projected level of spending for all subsequent years.

How can Social Security be fixed?

There are only a few ways to ensure the solvency of the programs, either cuts need to be made, revenues must be increased, or a combination of both.

There are a number of proposals to fix the programs like a Republican proposal to increase the full retirement age, currently 67, but detractors say that is a cut to benefits. Democrats have focused more on getting rid of the cap on income that can be taxed for the Social Security program which is $176,100 in 2025.

One thing is clear though that most agree on, the longer Congress delays taking action to resolve the financial shortcomings, the more painful and costly the solutions become.

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