With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern. Social Security isn’t at risk of bankruptcy — it’s funded primarily by payroll taxes — but its financial health is declining and benefits could eventually be cut unless Congress acts.
Each year, the trustees of the Social Security Trust Funds release a detailed report to Congress that assesses the financial health and prospects of this program. The most recent report, published on June 2, 2022, shows that the effects of the pandemic have not been as severe as predicted in last year’s report – good news this year.
The Social Security program consists of two programs, each with its own financial account (trust fund) that contains payroll taxes collected to pay Social Security benefits. Retired workers, their families and workers’ survivors receive monthly benefits under the Old Age and Survivors’ Insurance (AVS) programme; disabled workers and their families receive monthly benefits under the Disability Insurance (AI) programme. Other revenues (refunds from the general fund of the US Treasury and tax revenues from the taxation of benefits) are also deposited in these accounts.
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Money that is not needed in the current year to pay benefits and administrative costs is invested (in accordance with the law) in special government-guaranteed treasury bonds that earn interest. Over time, social security trust funds have built up reserves that can be used to cover benefit obligations if payroll tax revenues are insufficient to pay full benefits, and these reserves are currently being used. Due to the aging of the population and other demographic factors, workers’ contributions are no longer sufficient to finance current benefits.
In the latest report, the trustees estimate that Social Security will have funds to pay full retirement and survivor benefits through 2034, a year later than in last year’s report. At this point, the reserves will be exhausted and payroll tax revenue alone would be sufficient to pay only 77% of projected AVS benefits, decreasing to 72% until 2096, the end of the long-term projection period of 75 years old.
The Disability Insurance Trust Fund should be much healthier over the long term than predicted in last year’s report. The trustees now estimate that he will be able to pay full benefits until the end of 2096. Last year’s report predicted that he would only be able to pay scheduled benefits until 2057. Disability benefit claims have declined significantly since 2010, and the number of workers receiving disability benefits has been declining since 2014, a trend that continues to affect long-term prospects.
According to the trustees’ report, the Combined Reserves (OASDI) will be able to pay projected benefits through 2035, a year later than in last year’s report. After that, payroll tax revenue alone is expected to pay 80% of projected benefits, declining to 74% by 2096. OASDI projections are hypothetical, as OASI trust funds and of the AI are separate and, generally, the taxes and the reserves of a program cannot be used. to fund the other program. However, this could be changed by Congress, and the combination of these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole.
All projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and the directors recognize that the course of the pandemic and future events may affect Social Security’s financial condition.
You can view a copy of the 2022 Trustees report at ssa.gov.
What about health insurance?
Like Social Security, Medicare faces a significant funding shortfall. Medicare’s Hospital Insurance (HI) trust fund currently has a surplus due to higher revenues and lower short-term expenses, but is expected to be depleted in 2028, two years later than in the report. ‘last year. Once this fund is exhausted, tax and premium revenues would be sufficient to pay 90% of planned benefits, decreasing to 80% in 2046, then gradually increasing to 93% by 2096.
Many Options for Improving Social Security Health
The last 10 Trustees’ reports projected that OASDI’s combined reserves will be depleted between 2033 and 2035. Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions are less drastic and can be implemented gradually, mitigating the impact. on the audience. Many options have been offered, including the ones below. The combination of some of them can help soften the impact of any solution.
- Increase in the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and the other half by the employer (the self-employed pay the full 12.4%). An immediate and permanent increase in payroll taxes by 3.24 percentage points to 15.64% would be needed to cover the long-term shortfall.
- Raise or remove the ceiling on salaries subject to Social Security payroll taxes ($147,000 in 2022).
- Raise the full retirement age beyond the current age of 67 (for anyone born in 1960 or later).
- Raising the early retirement age beyond the current age of 62
- Reduction of future benefits. To address the long-term shortfall, planned benefits should be immediately and permanently reduced by approximately 20.3% for all current and future beneficiaries, or by approximately 24.1% if the reductions were only applied. to those who initially became eligible for benefits in 2022 or later.
- Change in the benefit calculation formula used to calculate benefits.
- Differently calculate the annual cost of living adjustment (COLA) for benefits.
A full list of potential solutions is available at ssa.gov/OACT/solvency/provisions.
Richard J Schillig is CLU (Chartered life underwriter), ChFC (Chartered Financial Consultants), LUTCF (Life Underwriter Training Council Fellow)