Will Social Security run out of money before you retire? What about Medicare? Well, there’s good news and bad news regarding the Social Security and Medicare trust funds, which help pay for these benefits. But relax; you should know that neither program is expected to stop paying benefits altogether, no matter when the trust funds run dry. Rather, at least a portion of promised benefits will be paid by new tax levies.
The 2024 annual Social Security and Medicare trustees report provides the latest projections.
When will Medicare and Social Security run out?
First, a bit of good news: The Hospital Insurance fund for Medicare Part A is expected to be able to fully pay scheduled benefits until 2036, five years longer than last year’s projection, according to a recently released report. When the trust fund is depleted, program tax income is expected to be sufficient to pay 89% of projected benefits.
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The Disability Insurance Trust Fund is in better shape. That fund is projected to be able to pay 100% of scheduled benefits through at least 2098, which is as far out as the report projects. In other words, it’s not expected to run out of money at all. This is an extension of last year’s projection, which also didn’t predict the fund running out of money before 2097, the last year of that report’s prediction period.
Now for the not-so-good news: The Old-Age and Survivors Insurance Trust Fund that pays Social Security retiree benefits is projected to run out in 2033, which is a year later than was projected last year. At that point, the fund's continuing income is expected to fund just 79% of scheduled benefits.
A recent report from the non-partisan Committee for a Responsible Federal Budget (CRFB) calculates that high-income couples could see their Social Security benefits slashed by over $21,000 annually starting in 2033. That assumes, of course, that Congress takes no action.
What made the projections change?
Trustees for Social Security revised their projections based on updated inflation and economic output data. They revised down their projected levels of gross domestic product and labor productivity by about 3%, accounting for data on inflation and U.S. economic output. The Hospital Insurance fund projection improved because of lower projected health-care spending that analysts said stemmed from more recent data.
According to the Center on Budget and Policy Priorities, a bipartisan Social Security financing deal in 1983, enabled Social Security to run a surplus each year until 2021. Then, in 2021, Social Security’s total cost exceeded its income and began to pull funds from reserves.
The trust funds’ reserves supplement the program’s income — from payroll taxes, income taxes on benefits paid to higher-income beneficiaries, and interest earned on the trust funds’ bonds — allowing Social Security to keep paying full benefits until the reserves are depleted.
Contrary to the fears of some retirees, benefits will not cease if Social Security’s trust funds run out of Treasury bonds to cash in. Money from income taxes would enable Social Security to continue paying about 79% of benefits.
Why are the funds inadequate?
According to the Bipartisan Policy Center 2023 trustee report, demographics are a big reason for the coming Social Security shortfall. There are fewer younger people paying taxes to support retirees. The ratio of workers paying Social Security payroll taxes to people drawing benefits has dropped from four-to-one in 1965 to just under three-to-one in 2022. About one out of every five U.S. residents, or 66 million people, collected Social Security benefits in February 2023, according to the Center on Budget and Policy Priorities. That number jumped to 72,554 million people in August of 2024.
Another issue, according to the latest Social Security Trustees report, has to do with income disparities and the cap on the amount of income that is taxed for Social Security. Social Security’s payroll tax, which covered 90% of total earnings in 1983, is projected to cover just 83% this year. This is because top earners' income has grown much faster than lower earners, placing more earnings above the taxable cap of $168,600 in 2024.
Proposals to bolster the trust fund and save Social Security range from increasing taxes on higher-income earners to raising the retirement age. As early as this October (2024) the Social Security Administration is expected to announce several adjustments to the program to take place in 2025. These changes may include:
- Your Social Security cost of living adjustment is likely to be smaller than in 2024.
- You may have to wait a little longer to reach your full retirement age (FRA) in 2025.
- In 2025, you'll have to earn more to qualify for Social Security credits, and the wage cap for Social Security taxes will increase.
Note: A version of this item first appeared in Kiplinger’s Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.
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