Medicare and Social Security funds are expected to run dry in around 10 years. There is still a chance Congress will address these funding issues after the upcoming election, possibly alongside a broader tax bill, so it’s likely that any real resolution can be postponed for several more years, no matter which party is in charge.
Strategists emphasize why this is a crucial topic to be discussed now with clients and plan sponsors.
Upcoming challenges
Because Social Security and Medicare face looming financial shortfalls, politicians remain deeply divided over how they should fix this problem. While some lawmakers argue that cutting benefits for retirees is an effective way to keep Social Security floating, some believe that trimming benefits could preserve the program without requiring significant tax increases.
The current system is believed to be unsustainable in its present form.
On the other hand, there are political leaders who advocate for raising taxes, especially on higher earners, in order to generate the needed revenue to support Social Security and Medicare and keep the benefits for people who depend on them. This suggestion of tax increases spreading across a broader segment of high-income earners could bring some stability to these trust funds over time.
There is a group between the extreme versions who favor a compromise approach, meaning establishing a bipartisan commission that can devise a plan that can combine both benefit cuts and tax increases. This middle solution reaches for distributing the burden more evenly and balances the need for fiscal responsibility and the recognition that cutting benefits or raising taxes alone would easily become unpopular among the voters.
Despite the urgency of this issue, it’s likely that Congress will continue the delay in taking any meaningful action. Politicians are wary of angering constituents on both sides of the debate—politicians are totally aware of angering both sides of the debate—either the retirees or the workers who don’t want their taxes to go up. There is a fear of backlash, especially when it comes to older voters, a powerful electoral bloc, which led to a pattern of kicking the road as we’ve seen in the past.
What’s going to happen with the political climate after the elections could play a role in Social Security and Medicare reforms, as until now it was a tendency to get postponed repeatedly. As a result, until the situation becomes even more critical, we may not see significant reforms in the programs, and the Congress might be forced to act under pressure.
Changing in US Demographics
The shifting in demographics is a major force behind the financial challenges facing Social Security. Back to 1960, the workforce was a lot larger compared to the numbers of retirees, with 5.2 workers supporting each Social Security beneficiary. With such a sustainable system, the taxes were comfortably paid by the working population, and it was easy to provide for retirees. However, with the population aging and birth rates declining, this ratio dramatically dropped. 2023 came with only 2.8 workers for every person who receives Social Security, and it’s projected to fall further to 2.2 workers per beneficiary by 2034.
This demographic shift comes with a significant challenge, and fewer workers are paying into the system. More people are living longer, and they draw benefits for extended periods. The longer life expectancy means that the financial burden covers more and more age sectors in retirees, and it’s harder to maintain the Social Security system without the right decisions, even if some may seem tough and often unpopular.
This difficulty in implementing major reforms is mostly influenced by political hesitancy. The last time Social Security faced a crisis was in 1983, and Congress has avoided substantial changes to the system since then, mainly because of the political risk involved. As time goes on, it starts to be more difficult to reform the system without profoundly affecting millions of Americans.
Eventually, there is going to be no choice for the Congress but to act. They are likely to do so in a way to avoid upsetting the older voters, and that is a powerful demographic sector. Cutting benefits for those near or already in retirement is unlikely, and instead, any changes might target the younger generations or higher-income individuals.
Possible scenarios:
They might increase payroll taxes on wages above the current income of $168,600. Any income above this line is not subject to Social Security payroll taxes. Eliminating or raising this cap could bring some revenue to shore up the trust fund.
Gradual reductions in future benefits—for the younger generations and higher-earning workers. This means that for those nearing or in retirement, the benefits will stay intact, but the future payouts for younger workers with higher incomes will be reduced.
These changes could manage the shortfall, but there is still careful navigation needed, considering political and public opinions where any adjustments to Social Security are viewed with intense scrutiny.
Medical and healthcare costs
On the same note as Social Security, the future of Medicare seems uncertain, as it faces both financial and political changes. Rising healthcare costs with an aging population are straining the system. This is the key area of concern for many policymakers. These are the important things to understand from Medicare’s financial structure:
The Hospital Insurance Trust Fund covers Medicare Part A, which pays for inpatient hospital care, skilled nursing facilities, and partially some home healthcare services. The HI fund is mainly financed by payroll taxes on workers’ earnings and income taxes on Social Security benefits. These funds might face a shortfall in the next few years, with an impact on the availability of benefits. Action is needed in this field.
The Supplemental Medical Insurance, playing for Medicare Part B, such as medical supplies, physician services, or outpatient care, and Part D, about prescription drug coverage. Unlike the HI trust funds, SMI doesn’t present an immediate risk of depletion, being funded through general revenues of the US Treasury. This means it can continue the funds through federal income taxes and government borrowing. The real challenge here resides in the rising costs. The government covers about 75% of Part B and D. Higher-income earners are required to pay an additional surcharge based on their modified adjusted gross income.
Healthcare inflation outpaces overall economic growth and exacerbates the problem. Medicare’s share of federal spending increases year by year, and it shows that by 2098, the costs would rise from the current 3.8% of GDP to 6.2%. It places a heavier burden on taxpayers and could potentially add to the national debt. This trend could jeopardize the program’s long-term viability if no changes are going to be made to how Medicare is funded or structured.
Future plans
With challenges of the aging population and rising healthcare costs, Medicare expenses are projected to jump to 6.2%. This means a significant financial burden on taxpayers and adds to the national debt.
A potential long-term solution might be to reduce premium subsidies for beneficiaries who can afford to pay more.
2024 Monthly Medicare Surcharges
The surcharge amount remains the same for all levels without giving a ban. For those whose income surpasses a certain threshold, you might need to pay the additional premium for that band.
The Social Security Administration uses the most recent federal tax returns from the IRS to determine surcharges. If you’ve already amended your return, you probably need to contact your Social Security office. Consult a tax professional to see the specifics of your situation.
You can order this book via Amazon, with explanations on the Social Security topic for any individual: Social Security For Dummies
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