By Michelle Singletary
What a difference a year makes.
Each year, the Social Security Board of Trustees releases a report that analyzes the current and projected financial health of Social Security and Medicare. You ought to care about what it finds, because these programs provide essential benefits for seniors. Previous reports have issued dire warnings of coming shortfalls.
There was a lot of anticipation about what the trustees would find this year as they weighed the impact of the coronavirus pandemic on these programs. In the end, the 2021 report wasn’t as bad as many expected, but it still wasn’t good.
“The finances of both programs have been significantly affected by the pandemic and the recession of 2020,” the trustees said.
This year’s report found a worsening financial situation partly because millions of workers have lost their jobs amid the pandemic, which has led to a significant drop in Social Security payroll taxes.
Last year, the trustees said the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, would be insolvent by 2034. The coronavirus took a year off that projection. The trustees now project the OASI fund will be insolvent in 2033, meaning there will be enough income to pay out only 76% of scheduled payments.
Let me put that in real numbers. As of July, the average monthly Social Security payment just for retired workers was $1,556.72. By 2033, without a funding intervention by Congress, that payment could be cut to $1,183.11.
Social Security was in trouble even before the pandemic, because the retirement of the baby-boom generation is expanding the number of beneficiaries much faster than the increase in the number of workers paying into the system, the trustees said. In 2021, an average of 65 million Americans will receive a Social Security benefit each month.
The Disability Insurance Trust Fund, which pays disability benefits, is in relatively better shape than the OASI fund, in part because applications have been decreasing since 2010. The number of disabled-worker beneficiaries receiving payments has also decreased. So, that fund is estimated to become depleted in 2057, notably eight years earlier than the 2020 estimate. The shortfall means that only 91% of benefits will be payable.
The Hospital Insurance Trust Fund, or Medicare Part A, which helps pay for services such as inpatient hospital care, is projected to be able to pay scheduled benefits until 2026. If the fund’s reserves are depleted, total program income will be enough to cover only 91% of benefits that year, and only 78% in 2045, according to the report for this fund.
“Having strong Social Security and Medicare programs is essential in order to ensure a secure retirement for all Americans, especially for our most vulnerable populations,” Treasury Secretary Janet Yellen said in a statement.
Whenever I give a presentation about retirement planning, I talk about how Social Security should factor into people’s plans. Inevitably, a young adult will voice a concern that Social Security won’t be of much help to them. And yet, we know many people heavily rely on it.
A Gallup poll this year found that 38% of U.S. adults not yet retired thought Social Security would be a major source of their income. The reality is 57% of retirees rely on Social Security as their main source of income.
Here’s the bottom line: Congress can no longer delay fixing these shortfalls.
One solution often debated is getting rid of the income threshold for the Social Security payroll tax. This year, the maximum taxable earnings subject to the Social Security tax is $142,800. Earnings above the maximum are not subject to the tax, which is 6.2% for employees and a matching 6.2% for employers.
There’s no income cap for the Medicare tax, which is 2.9%. (Employers pay 1.45%, and employees cover the other half.)
The self-employed pay the entire 12.4% for Society Security and 2.9% for Medicare. Increasing the Medicare tax to 3.67% or cutting expenses by 16% could help fix the shortfall, the trustees said.
“More realistically, the tax and/or benefit changes could occur gradually,” the trustees said. “Lawmakers have many options to address the long-range financial imbalance.”
None of the solutions is ideal and all would no doubt face a lot of pushback, but something has to be done – and soon.
“It makes no sense that we allow programs as essential as Social Security and Medicare to remain on such shaky and uncertain fiscal ground,” Michael Peterson, chief executive of the Peter G. Peterson Foundation, said in a statement. “There are many, well-known solutions available and it is fully within our lawmakers’ control to put these programs on a more sustainable path. Failure to do so is both irresponsible and unfair to the millions of Americans who rely on them, especially those counting on these programs in the future.”
It’s incorrect to say that Social Security will be bankrupt, but it’s not overstating the fact that it will have a serious shortfall in income to cover promised payments.
“If this pandemic has taught us anything, it’s the importance of preparedness,” Peterson said.
There’s a lot going on globally and domestically, but the administration and Congress can’t keep kicking this issue down the road, because that road is getting dangerously close to a dead end.
Michelle Singletary is a personal finance columnist for The Washington Post. Her column runs on Sunday.