The Social Security Administration (SSA) this month released its annual trustees’ report, which sheds light on the current and projected financial health of the government’s various social programs. Overall, Social Security and Medicare together accounted for 41 percent of all Federal expenditures in fiscal year 2019, and both of these programs will experience cost increases substantially in excess of U.S. gross domestic product (GDP) growth through the mid-2030s. The report’s authors attribute this in part to rapid population aging, caused by the large baby-boom generation (beneficiaries) entering retirement at a faster pace than can be replaced by lower-birth-rate generations entering employment.
As costs start to exceed income, the researchers estimate that the Medicare Part A (hospital insurance) trust fund will be depleted in 2026, and the combined reserve funds for the Old Age and Survivors Insurance (OASI) and Social Security Disability Insurance (DI) programs should last until 2035, unchanged from the 2019 forecast. Going forward (after 2035) tax income is projected to be sufficient to cover only around 79 percent of the scheduled benefits through 2094 (end of projection period). One way to interpret all of this is that Millennials can expect these social programs to be there for them when they retire, but the benefit they receive may be smaller than what retirees are currently awarded. Projections could of course improve if economic growth accelerates or the social programs undergo certain changes.
For the latter, the report’s authors once again argue that lawmakers have a “broad continuum of policy options that would close or reduce the long-term financing shortfall” of both Social Security and Medicare. However, the researchers also stress that lawmakers must act “in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them,” especially since much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted. The SSA in a separate report even warned that maintaining long-term solvency with changes that do not begin until 2035 could require a permanent 3.65 percentage point payroll tax rate increase, a permanent 23 percent reduction in all benefits, or some combination of these approaches.
More importantly, all of the uncertainty still surrounding the sustainability of the Social Security and Medicare programs should provide yet another reason for Americans to strive to reduce their old-age, government-related financial dependency. Some of best ways to do this are to set aside as much money for retirement as possible, and to work with a professional advisor to set up a long-term financial plan. Utilizing tax-advantaged savings vehicles like 401(k)s, IRAs, and HSAs can provide additional help, and the sooner one can start the better because compound interest and other investment returns over long time horizons can be one of the most powerful ways of ensuring a comfortable and financially secure retirement.
Sources: U.S. SSA