You work your entire career and finally retire. At long last, it's time to enjoy your golden years. Life should be smooth sailing, right? That's the ideal plan. However, the reality is that things can and usually do get in the way.
Unfortunately, two huge issues are steamrolling toward a collision with America's senior citizens. Social Security is running out of money. But there's an even more urgent concern for retirees.
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Social Security's ticking bomb
It's no secret that there's a ticking bomb with Social Security. The popular federal program has two separate trust funds -- accounts in the U.S. Treasury. The Old-Age and Survivors Insurance (OASI) Trust Fund pays Social Security benefits for retired workers and their survivors. The Disability Insurance (DI) Trust Fund pays Social Security disability benefits. Both trust funds will soon be depleted.
How soon? The nonpartisan Congressional Budget Office (CBO) projects that the OASI Trust Fund will run out of money in 2032. The CBO predicts that the DI Trust Fund will be exhausted in 2052.
Although the two trust funds are separate accounts, Congress would likely dip into the DI Trust Fund to help pay retiree and survivor benefits once the OASI Trust Fund runs out of money. That won't help much, however. If the two trust funds were combined, they would both run out of money in 2033.
The bottom line is that Social Security benefits must be slashed across the board by 25% in 2034 unless changes are made. Importantly, Social Security won't be bankrupt when the trust funds are depleted. Ongoing payroll taxes will continue to fund roughly 75% of benefits.
The more urgent concern
What could be more urgent than steep benefit cuts for every Social Security beneficiary just a decade away? There's also a ticking bomb for Medicare -- and it has less time on the clock than Social Security does.
The Medicare Board of Trustees projects that the Hospital Insurance Trust Fund, which helps pay for Medicare Part A benefits, will be exhausted by 2031. And that reflects an improved scenario. In 2022, the trustees predicted that the Medicare program would become insolvent in 2028.
Don't expect the year to be pushed back so much again, though. The shift from 2028 to 2031 was due in large part to overall healthcare spending on seniors declining during the COVID-19 pandemic and taking longer than anticipated to rebound.
While the threat to Medicare is more urgent than the one for Social Security, it's not quite as severe. When the Hospital Insurance Trust Fund runs out of money, Medicare Part A benefits would be cut by 11%. In 2047, however, the benefit cuts would rise to 19%.
Medicare Part B, which covers outpatient services, and Medicare Part D, which covers prescription drugs, aren't in as dire straits as Part A. These two programs have a separate trust fund (the Supplemental Medical Insurance Trust Fund) that's primarily funded from premiums paid by enrollees and general revenue from federal income taxes and other sources.
What can be done?
There are three basic solutions to the problems facing Social Security and Medicare: increase revenue, reduce spending, or a mixture of both. All of these options have pros and cons.
Increasing the payroll taxes that fund Social Security and Medicare would generate greater revenue for the programs. So would raising or eliminating the payroll tax cap for Social Security (there is no cap for Medicare). The downside to these moves, though, is that at least some Americans would keep less of their paychecks.
The federal government could shift more general revenue to help fund Medicare (and potentially do the same for Social Security). This, however, would mean less money for other government priorities.
Reducing spending could be accomplished in several ways. Social Security benefits could be reduced. Medicare reimbursements to healthcare providers could be lowered. Medicare beneficiaries could have to pay higher premiums or share more costs. The eligibility ages for Social Security and Medicare could be raised. Any of these actions would cause financial pain for some Americans.
Politicians don't want to incur the wrath of voters negatively impacted by the necessary solutions to fix Social Security and Medicare. Changes will likely be on the way sooner or later, though, because the alternative to not addressing the issues is worse than the solutions that might be required.
