Every year, the Trustees of the Social Secu­ri­ty  and Medicare Trust Funds release reports to Con­gress on the cur­rent finan­cial con­di­tion and pro­ject­ed finan­cial out­look of these pro­grams. The newest reports, released on July 13, 2017, dis­cuss the ongo­ing finan­cial chal­lenges that both pro­grams face, and project a Social Secu­ri­ty cost-of-liv­ing adjust­ment (COLA)  for 2018.

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 finan­cial account (a trust fund) that holds the Social Secu­ri­ty pay­roll tax­es that are col­lect­ed to pay Social Secu­ri­ty 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 built up reserves that can be used to cov­er ben­e­fit oblig­a­tions if pay­roll tax income is insuf­fi­cient to pay full benefits.

Note that the Trustees pro­vide cer­tain pro­jec­tions based on the com­bined OASI and DI (OASDI) Trust Funds. How­ev­er, these pro­jec­tions are the­o­ret­i­cal, because the trusts are sep­a­rate, and gen­er­al­ly one pro­gram’s tax­es and reserves can­not be used to fund the oth­er program.

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 com­pris­es 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, when 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 “inter­me­di­ate” 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.

Why are Social Secu­ri­ty and Medicare 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 of baby boomers reach retire­ment age, Amer­i­cans live longer, and health-care costs rise.

What is being done to address these challenges?

Both reports 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 some of these solu­tions may also lessen the impact of any one solution.

Some long-term Social Secu­ri­ty reform 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 cur­rent­ly sub­ject to Social Secu­ri­ty pay­roll tax­es ($127,200 in 2017).
  • Rais­ing the full retire­ment age beyond the cur­rent­ly sched­uled age of 67 (for any­one born in 1960 or later).
  • Reduc­ing future ben­e­fits. Accord­ing to this year’s report, 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.
  • Chang­ing the ben­e­fit for­mu­la that is used 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.

You can view a com­bined sum­ma­ry of the 2017 Social Secu­ri­ty and Medicare Trustees Reports and a full copy of the Social Secu­ri­ty report at ssa.gov.  You can find the full Medicare report at cms.gov.


Con­tent by:  Broad­ridge Finan­cial Solu­tions, Inc.

 July 2017