When Time and Funds Run Out

The Social Security and Medicare trust funds are projected to be insolvent in a few years. What can be done about it?

The trustees of the Social Security and Medicare trust funds recently released their annual report on the current and projected financial status of the two programs. It provides answers to questions I’m sure a lot of you have questions about how the funds work and the looming shortfall looming due to our aging society. Here are answers to some of the common ones I've heard.

What are the trust funds?

The Social Security trust funds are officially the Old Age and Survivors Insurance and  Disability Insurance trust funds (together they’re known as OASDI). The accounts are managed by the Treasury Department. They provide an accounting mechanism for tracking income to and disbursements from the trust funds as well as holding asset reserves.

How is OASDI funded?

OASDI relies mainly on 12.4% payroll tax on wages. Employees and employers each pay 6.2% on wages up to $142,800 in 2021. The Medicare Hospital Insurance program finances inpatient hospital coverage for seniors and some workers with disabilities. It’s funded mainly via a 2.9% payroll tax (1.45% each for employee and employer, with no maximum taxable wage amount). High wage earners pay an additional Medicare tax rate of 0.9%.

What happens when the trust funds are depleted?

The 2021 report was not as dire as some had predicted. Some experts speculated that due to the ongoing pandemic and accompanying high rate of unemployment, the funds might become insolvent in less than 10 years. The actual time frame turned out to be 13 years, in 2034. The cost of the program is projected to exceed total income this year. 

Many people believe that if the trust funds are depleted, Social Security would be

unable to pay benefits at all. But that’s not the case. In 2034, according to the report, the program is projected to have enough tax revenues to pay 76% of scheduled benefits. 

What can be done to make the future look brighter?

It will take legislation to fix the problem, but it wouldn’t be the first time Congress took action to shore up Social Security. When lawmakers last addressed Social Security’s solvency in 1983, they used a combination of tax increases and benefit reductions to improve the financial condition of the combined trust funds. 

Social Security’s chief actuary has outlined potential changes that could address the issue of trust fund solvency. The options fall into eight categories:

  • Cost-of-living adjustment changes
  • Changing the calculation of the benefit
  • Increasing the retirement age 
  • Changing entitlement of family members
  • Increasing payroll tax revenue
  • Covering additional earnings such as some state workers that are exempt from OASDI taxes
  • Investing the trust fund in equities
  • Changing the way benefits are subject to income tax

The Committee for a Responsible Federal Budget, a nonpartisan organization, has created The Reformer, an interactive tool that enables users to see the impact of potential changes to Social Security. Using it, I came up with a plan that included:

  • Slowing the benefit growth for the top 20 percent of earners 
  • Raising the full retirement age to 69
  • Limiting spousal benefits for high earners
  • Computing benefits on the highest 38 years of income instead of the highest 35 years 
  • Means-testing benefits for higher earners 
  • Raising the maximum taxable wage amounts 

Under my plan, the trust funds would still run out in 2045 and beneficiaries would still face a 4% benefit cut. There were more drastic cuts available and other ways to increase revenues, but if you didn’t like my choices, you definitely wouldn’t be happy with some of the other options.

This is probably why it’s taking so long for Congress to take action to fix the problem. The remedies won’t be easy or popular for many Americans.