Have you ever thought to yourself: wouldn’t it be nice to have a trust fund? Well, the good news is, you do. More than one actually. There’s the Social Security trust fund and the Medicare trust fund. Think of them like big bank accounts, designed to ensure that, when the time comes, there will be enough money to provide you with retirement benefits and subsidized health care.
The bad news is that these bank accounts are slowly drying up. Monday, we learned that the Medicare trust fund will be fully depleted in 2030, and the Social Security trust fund soon after that, in 2033.
Contrary to any headlines you may have seen, that doesn’t mean Medicare and Social Security are going bankrupt, or that they will cease to exist in the coming decades. What it does mean is that starting in the 2030s, there won’t be enough money to cover 100 percent of their costs. Social Security will be able to pay out about 75 percent of scheduled benefits and Medicare more like 85 percent.
If you are under 50, and still hoping to receive your full retirement benefits, something will have to change.
What kinds of changes are we talking about?
Medicare is actually in far better shape than it was just 10 years ago. Back in 2006, experts estimated that the Medicare trust fund would be empty by 2018. Today, they said 2030. What happened in the interim? Health care costs stopped growing quite so fast, partly as a result of initiatives in the Affordable Care Act. It’s not clear if this slowdown will continue, or whether other cost-cutting changing may be necessary, but for now there’s renewed optimism about the long-term viability of Medicare.
Social Security is a slightly different story. The last time Congress made any significant change to the program was in 1983, when it increased the amount of tax revenue going into the Social Security trust fund. That infusion of new revenue helped shore up Social Security’s funding for decades. Unfortunately, though, the retirement costs for “baby boomers” have proved even higher than expected, which is why the Social Security trust fund is once again out of balance.
There are several different ways to fix the Social Security shortfall. We could:
• Increase taxes. Social Security is funded chiefly through a tax on wages, called a payroll tax. Currently that tax only applies to about the first $100,000 people earn. That means workers who make $100,000 pay exactly the same amount in payroll taxes as those who earn $1 million. Eliminating that exemption for higher-wage workers would help re-fill the trust fund.
• Cut benefits. Currently, the average retiree gets less than $16,000 a year in Social Security benefits. If the benefit level were reduced, that would keep the trust fund solvent for a longer period of time. It’s worth noting, thought, there’s a bit of circular reasoning here. Remember, the underlying problem is that when the trust fund runs out, Social Security benefits will need to be cut. Cutting benefits now, before the trust fund runs out, is a bit like quitting your job because you fear your company may go out of business in 20 years.
Anything else I should know?
There is one funding shortfall that really does need to get addressed soon, and it’s the Social Security disability program. Social Security doesn’t just help retired workers. It also helps people who can no longer work because of a serious medical impairment.
The number of people relying on Social Security disability has grown much faster than expected -- partly because of the aging population, partly because of the growing number of women in the workforce. There’s a separate trust fund for the disability program, and it’ll be empty by 2016. Fortunately, there’s a short-term fix that doesn’t require any new tax revenue. Congress can simply redirect money from traditional Social Security into the disability program.
You might think this would just make the regular Social Security trust fund run out faster, and it would (slightly). But the main fund is so much bigger that the impact would be quite small.