Simply put, there's nothing more important for retirees and pre-retirees than the long-term survival of the Social Security program and Medicare. Nearly three-fifths of all retired seniors count on Social Security to provide a majority of their monthly income, and seniors eagerly await the chance to enroll in Medicare when they turn 65, as the cost of government-sponsored care has been shown to often be cheaper than remaining on an individual plan offered by a private insurer.
However, the dynamics of Social Security and Medicare are rapidly changing. Thus, it's important for seniors and pre-retirees to pay close attention to the annual updates from the Social Security and Medicare Board of Trustees. Last week, this Board of six trustees released its findings for 2016, highlighting the current data and future expectations for both social programs. Here are 10 figures from the Board of Trustees' report that you absolutely have to know.
On Social Security
1. Cash surplus for OASDI of $2.813 trillion
Believe it or not, the Old-Age, Survivors and Disability Insurance Trust, or OASDI, ended 2015 bringing in slightly more via payroll taxes than it paid out. The OASDI finished with more than $2.8 trillion in excess cash reserves, which it primarily invests in specially issued bonds intended just for trust funds, as well as certificates of indebtedness. Unfortunately, most of the top-yielding bonds are set to mature in the coming one-to-five years, leaving the remaining cash in the Trust earning 3% or less.
2. OASDI will be cash flow positive through 2019
Not only did the OASDI bring in more cash via payroll taxes than it paid out in 2015 -- payroll taxes for Social Security are 12.4% on the first $118,500 in earnings, although you and your employer usually split this responsibility down the middle, 6.2% a piece -- but it's on track to continue to do so through 2019. Beginning in 2020, however, the aforementioned cash reserves will begin to shrink as cash flow turns negative, a direct result of more baby boomers becoming eligible for Social Security benefits.
3. 75-year OASDI actuarial deficit of 2.66%
According to the Board of Trustees, over the next 75 years, assuming no new laws are passed in Congress, the OASDI is expected to run an average annual deficit of 2.66%. For those who regularly keep up with the Board of Trustees' annual reports, this is down two basis points from 2015. Nonetheless, what this figure suggests is that if payroll taxes were raised right now by 2.66%, or 1.33% per employee and employer, the Board of Trustees projects there would be no shortfall of benefits in the OASDI through 2090.
4. Disability Insurance Trust depletion by Q3 2023
However, because there is an actuarial long-term deficit, the Disability Insurance Trust, which covered nearly 10.8 million people as of April 2016, is slated to burn through its excess cash reserves by the third quarter of 2023. The DI Trust was actually expected to deplete its cash reserves by 2016, but the Bipartisan Budget Act of 2015, which reallocated a percentage of the payroll tax revenue from the OASI Trust to the DI Trust, extended the life of the DI Trust an additional six years to 2022, based on the 2015 Trustees' report. Updated demographic and economic data, though, has pushed that depletion date back an estimated year to Q3 2023 based on this year's report.
5. OASDI cash reserve depletion by 2034
The OASDI is expected to burn through its cash reserves by 2034, which is unchanged from the previous Board of Trustees report. Assuming Congress enacts no new laws governing payroll taxes or benefits, a benefit cut of up to 21% may be needed to extend the life of the program through 2090. Note that this doesn't mean the program is going bankrupt -- but it does mean seniors who are heavily reliant on Social Security could be in trouble.
6. Social Security will account for 6% of U.S. GDP by 2035
This may not come as a shock considering the data above, but Social Security costs as a percentage of U.S. GDP are expected to increase over time. The retirement of baby boomers over the coming 15 years is expected to push Social Security's cost as a percentage of GDP from 5% in 2015 to 6% by 2035. Beyond 2035, the Board of Trustees expects only a minimal increase to 6.1% of GDP by 2090. In other words, baby boomers are really expected to weigh on Social Security in the coming two decades.
7. Supplemental Medical Insurance to remain fully financed
If seniors are looking for a ray of good news, it's that Supplemental Medical Insurance (SMI), which helps seniors cover their portion of costs tied to Medicare Part B (outpatient services) and Part D (prescription drug plans), is expected to have ample capital for the indefinite future. The Trustees' report lists the beneficiary premiums generated from SMI, as well as general revenue, as reasons why financing won't be an issue. Still, an aging population and rising healthcare costs are expected to push SMI's costs as a percentage of GDP from 2.1% in 2015 to 3.7% by 2035.
8. 75-year Hospital Insurance Trust actuarial deficit of 0.73%
Just as the OASDI has a 75-year actuarial deficit, the Hospital Insurance Trust, which covers Part A (hospital/inpatient services) expenses, is also expected to run a deficit of 0.73% over the coming 75 years. Whereas Social Security's portion of the payroll tax totals 12.4%, Medicare's equates to 2.9%, or 1.45% per employer and employee. The Board of Trustees' actuarial deficit estimate, which is up five basis points from its report last year, suggests that Medicare's payroll tax should be more like 3.63% in order to ensure that reimbursements to hospitals and physicians aren't reduced through 2090. The five basis point increase was a result of higher projected medical utilization rates by patients, and lower payroll tax revenue collected than initially projected.
9. Hospital Insurance Trust depletion date of 2028
Assuming Congress makes no changes to existing Medicare policy, the Hospital Insurance Trust is expected to burn through its excess cash reserves by 2028. This is actually two years sooner than the Board of Trustees had predicted last year, making Medicare's sustainability over the long-term an even more pressing issue than Social Security. If the HI Trust cash reserves are depleted, reimbursements to physicians and hospitals are expected to decline by 13% to keep Medicare budget-neutral.
10. Medicare costs are rising faster than Social Security's costs
Finally, we learned that Medicare's total costs are expected to rise at a substantially faster pace than expenses tied to Social Security. In 2016, Medicare expenses are expected to be 73% those of Social Security. By 2090, Medicare's annual expenses are projected to be 98% of the cost of Social Security. Combined, the two programs equate to an estimated 8.6% of GDP in 2016, and could comprise 11.5% of GDP by 2035.
The theme of the report, as it has been for years, is that Social Security and Medicare need help. It also implies that seniors and pre-retirees need to ensure that they have alternative channels of income during retirement. Relying solely on Social Security could prove dangerous with possible benefit cuts coming. Similarly, rising healthcare costs could make seniors' lives miserable if they haven't factored these expenses into their retirement. My suggestion is to take these facts above to heart and use them to readjust your retirement goals, if need be.