Sustainability of Medicare and Social Security

Many were rightfully concerned when the Trustees’ of the Medicare and Social Security Trust Funds released their report indicating that Medicare would go bankrupt in 2026 (three years earlier than the prior projection). Social Security goes bankrupt in 2034 – although it is unchanged from prior estimates.

These challenges are not new. Individuals are living far longer than originally anticipated when Social Security was created in 1935. As a comparison, the average life expectancy for a 30-year-old in 1935 was 68 for men and 70
for women. Today it is 79 for men and 82 for women. Medicare has been struck with higher-than-estimated medical costs in addition to longer lifespans.

Today, nearly all the money paid out to Social Security beneficiaries are FICA taxes collected on today’s workers. Essentially a pass through — in from one workers and transferred to beneficiaries. This approach may be fine if the number of beneficiaries and current workers remained the same. However, that is not the case. The number of beneficiaries is expected to dramatically rise, while the number of workers paying into the system is not.

If the system was properly funded, the money coming in from today’s workers would not only pay for current beneficiaries but an amount for future beneficiaries. Since the cost for future beneficiaries is not being properly funded, Social Security is basically borrowing money from the government. Sort of borrowing from itself.

With no changes, Social Security will not be able to pay 100% of owed benefits after 2034. But, they will continue to pay some benefits. Like today, we could continue to transfer the taxes earned from the current workers in 2034. Based on the assumptions used in the report, the Trustees’ estimate beneficiaries would receive 82% of their “promised” benefits through 2040. This percent would gradually decline to 78% by 2090.

What corrective actions could be taken to improve the solvency of Social Security? One of the simplest is to raise the age people can collect full benefits. This would essentially start the process of indexing when benefits start with changes to longevity. Other “easy” fixes could be to raise FICA taxes and/or tax more of someone’s income (there is a maximum amount of wage income currently taxed). Or some combination of the three.

These are real issues and they need to be addressed. The longer Congress waits, the more draconian the adjustments will likely have to be. However, given the current political divide, any agreement on such a controversial issue seems to be a long shot.

Of course, one could support and vote for candidates with a willingness to solve budget issues — realizing that compromise is necessary. But that seems to be to wishful thinking.