Medicare and Social Security: A Good News, Bad News Story

The good news for Medicare is that the program’s outlook has improved considerably in the past year. According to the trustees, Medicare’s Hospital Insurance Trust Fund is in good shape until 2030 — that’s four years longer than the trustees projected last year — and 13 years longer than they anticipated the year before the passage of the Affordable Care Act (ACA).1

The slow increase in costs is being driven by well-documented demographic trends: fewer workers to fund the system and more retirees tapping into the system. To a lesser extent, Social Security is being weakened by the Disability Insurance portion of the program, which is now projected to run out of money in just two years — 2016 — unless Congress acts to remedy the problem.

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The Social Security Trust Fund has experienced rapid changes in the past few years. According to The Center for Retirement Research at Boston College, until 2009 Social Security was running cash surpluses that were expected to last for years. But the Great Recession brought with it a decline in payroll taxes coupled with an increase in benefit claims. In 2010, these factors resulted in Social Security outflows exceeding its income — a pattern that experts say will continue indefinitely.4

The shift from surplus to deficit means that Social Security is currently chipping away at the interest earned on the Trust Fund to cover benefits. By 2020, it is predicted that workers’ payroll taxes combined with Trust Fund interest will not be enough to cover annual benefit payments, and by 2033, Trust Fund assets are projected to be depleted.4

That’s not to say that Social Security will become extinct. Being a pay-as-you-go system, researchers at Boston College predict that payroll taxes will continue to cover 75% of benefits for the period indicated.4 Yet with just 75% of benefits covered, “something will have to give” — for example, Social Security benefits may decline for future retirees, payroll taxes may increase for workers, or some other yet-to-be-determined solution will be needed to restore the system to long-term solvency.

A Politically-Charged Path to Resolution

While it remains to be seen if and when a bitterly divided Washington will act to “fix” Medicare and Social Security, finding a solution is critical for the future of the country and for each American who hopes to rely on these important programs for financial support in their later years.

1Kaiser Health News, “Good News for Boomers: Medicare’s Hospital Trust Fund Appears Flush Until 2030,” July 28, 2014.

2The New York Times, “Gains Seen for Medicare, but Social Security Holds Steady,” July 28, 2014.

>3The New York Times, “Good News and Gloom for Medicare, Wrapped in a Mystery,” July 28, 2014.

4The Center for Retirement Research at Boston College, “Social Security’s Financial Outlook: The 2014 Update in Perspective,” August 2014.

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Post by Phil Ratcliff

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