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Are Social Security and Medicare going bankrupt? Don't fall for the hype.

Social Security and Medicare form the bedrock of post-retirement life in America. These are huge programs into which you pay during your working years in order to reap the benefits on retiring.

You might have heard that Social Security and Medicare trust funds are running out of money and soon may no longer be able to pay benefits. Scary, right? Is this real? Is this the end of the road for these programs? What will happen when you retire?

 In this blog we take a look at the real situation on the ground in order to clear up the air for our readers.

How are Social Security and Medicare Trusts funded?

In order to understand their status, you first need to understand how these Trusts get funded. 

Generally speaking, employees pay FICA taxes of 7.65% of income every year, with employers pitching in with another 7.65%. Out of this total of 15.30%, 10.03% goes towards Social Security (OASI), 2.37% towards Disability Income (DI) and 2.90% towards Medicare Part A (HI). There is a cap on Social Security taxes and high-income earners pay additional Medicare tax.

Payroll taxes are not the only means of income for these trust funds. Taxes on Social Security benefits and interest earned on reserves are other major sources of income as well. For Medicare Part A, premiums also contribute a reasonable sum, even though most people who qualify for Medicare also qualify for premium-free Part A. Medicare Part B and Part D are directly supported by general revenue, premiums and other sources.

Here is a status summary of Social Security and Medicare Trust Funds, based on recent annual reports published by their Boards of Trustees. 

Table A: Social Security and Medicare Trust Funds – Financial Status

(in Billions of US Dollars, rounded to nearest billion)

 

 

Social Security (OASI)

Disability Income (DI)

Medicare Part A (HI)

Medicare Part B & Part D (SMI)

 

 

 

 

 

Status as of end of year

2018

2018

2017

2017

Reserves

$2,798

$97

$199

$96

Income during year (incl. support)

$831

$172

$299

$406

Program cost during year

$854

$147

$297

$414

General Revenue support during year

-

-

-

$293

 

 

 

 

 

Projections:

 

 

 

 

Reserves get depleted in year

2034

2052

2026

Already there

Income/Benefits Ratio immediately after depletion of reserves

0.77

0.91

0.91

-

All figures are from Boards of Trustees’ 2018 and 2019 Annual Reports

 

Let us look at each of these trust funds individually.

 

1. Social Security Trust Fund (OASI)

The OASI program (not including DI) has started eating into its reserves. The shortfall is projected to keep increasing and taking a bigger bite out of the reserves every year. 

At this rate, the OASI reserves will get fully depleted in 2034, after which continuing income will be sufficient to pay 77% of full benefits. 

 

2. Disability Income Trust Fund (DI)

There is good news regarding Disability Income. Disability claims and payouts have been decreasing, as a result of which the DI trust fund added to its reserves during 2018. This trend is projected to continue before reversing.

DI reserves are now expected to last until 2052, after which the fund is projected to be able to pay 91% of benefits. 

 

3. Medicare Part A Trust Fund (HI or Hospital Insurance)

Medicare Part A program’s income and cost roughly evened out during 2017. From 2018 onwards, HI trust fund’s costs are projected to exceed its income and start eating into its reserves.

HI trust fund’s reserves are not much (relatively speaking). They are less than one year’s expenditure and are therefore expected to get fully depleted quickly, in 2026 to be more precise. After that, continuing income is projected to meet 91% of the benefits.

 

4. Medicare Part B & Part D Trust Fund (SMI or Supplementary Medical Insurance)

SMI program’s financials are a different story. Your FICA taxes do NOT support this program. The program is partly funded through premiums, with the lion’s share (roughly 75%) of the cost being directly supported by the federal budget.

Given that the program is already directly supported through General Revenue, for all practical purposes its reserves are already depleted (they are less than a year’s shortfall which is covered through general revenue support).

 

So what are we saying?

Here is the bottomline. 

  • Social Security will still be able to pay about 77% of full benefits even after reserves are fully depleted around 2034,
  • Disability Income will still be able to pay 91% of full benefits after running out of reserves around 2052,
  • Medicare Part A (HI) runs out of reserves the soonest – around 2026, but will still be able pay 91% of full benefits,
  • Medicare Part B and Part D are already supported through premiums and general revenue. It seems this will continue to be the case in future as well.

There you go. Now that you are better informed, do not fall for any hype. We do need to shore up Social Security and Medicare, but they are going to be there when you retire.

Was this article helpful? We would really like to hear from you. Suggestions are always welcome. You can email us at contact@lightedroadinsurance.com.

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