Outlook darkens for Social Security, Medicare solvency

Higher health care costs and a law Congress passed last year to boost retirement benefits for public sector workers worsened the long-term outlook of Social Security and Medicare trust funds, according to annual reports released Wednesday by the programs’ trustees. 

The trust funds for Medicare and Social Security benefits would be depleted faster than expected compared to last year’s estimates, losing the ability to provide full benefits to retirees in some cases years earlier than previously projected.

The Hospital Trust Fund will only be able to pay 100 percent of scheduled benefits until 2033, three years earlier than the trustees reported last year, according to the trustee report. After that point, the program will only be able to pay 89 percent of total scheduled benefits, a summary says. 

The change is due to higher-than-expected spending on hospital and hospice care in 2024. The trustees increased future projected spending to account for that growth, including more spending for inpatient and hospice services in the early years of the projection. 

The trustees have sounded the alarm on the Hospital Trust Fund for years, though the warnings have mostly been ignored by Congress, which views Medicare reform as politically challenging. 

Republicans briefly considered decreasing payments to Medicare Advantage plans in the reconciliation package, before quickly backing down amid opposition from the insurance industry. 

The trustees recommended Congress increase the standard payroll tax rate or reduce Medicare spending to address future shortfalls. 

Meanwhile, the Supplementary Medical Insurance Trust Fund, which is primarily funded by beneficiary premiums, is adequately financed into the indefinite future. Expenditures for Medicare Part D, which covers prescription drugs, are projected to grow by an average annual rate of 7.1 percent over the next five years, which could affect the premium rates.

Total Medicare expenditures represented 3.8 percent of the gross domestic product in 2024 but is projected to grow to 6.7 percent by the end of the 75-year projection period. 

Social Security

The long-term combined outlook of the Social Security Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund worsened slightly, speeding up by about three calendar quarters compared to last year’s projection, thanks largely to the passage of a law last year that boosts benefits for public sector retirees.

Absent congressional action to shore up the program, the Social Security Old-Age and Survivors Insurance Trust Fund would lose the ability to pay full benefits to retirees starting in the first quarter of 2033, at which point benefits would face a 23 percent cut. That’s the same calendar year projected last year, but the estimated depletion date moved up three calendar quarters, the trustees said in the report. 

If combined with the Disability Trust Fund, which would require congressional action, the Social Security Trust Fund could pay out full benefits until the third quarter of 2034, three quarters earlier than last year’s 2035 projection. At that point, retirees would see their benefits cut by 19 percent. 

Former President Joe Biden in January signed into law the boost in Social Security benefits for public sector retirees that accounts for much of the faster depletion of the trust fund. The law eliminated a pair of provisions that docked benefits of retirees who worked for state or local governments or other jobs where their wages weren’t subject to Social Security taxes.

The Congressional Budget Office estimated the legislation would cost $196 billion over a decade and hasten the depletion of the Social Security trust fund by six months.

While that legislation accounted for much of the weaker long-term outlook of Social Security, shifting assumptions about fertility rates and wage growth also contributed to an earlier expected depletion. In a change from last year, the trustees estimated it will take a decade longer to recover from historically low fertility rates compared to last year’s report, which estimated the birth rate would recover by 2040.

The trustees also expect workers’ wages to grow more slowly as a share of the GDP compared to earlier estimates, based on historical trends.

Since 2008, retirement costs have grown much faster than payrolls, as baby boomers leave the workforce and younger, smaller generations replace them. That dynamic is projected to persist until about 2040, at which point the shortfall will continue to grow, but more slowly until about 2080. 

A senior government official on a call with reporters said faster wage growth from 1980 to 2000 for high earners than for workers whose compensation is fully subject to Social Security payroll taxes also contributed to the depletion. Only the first $176,100 in annual compensation is subject to Social Security taxes in 2025. 

To keep the Social Security Old-Age and Survivors Insurance Trust Fund and Disability Insurance Trust Fund fully solvent for at least the next 75 years, Congress would need to increase Social Security payroll taxes by 3.65 percentage points to 16.05 percent retroactive to January of this year, benefits would need to be cut by 22.4 percent or some combination of the two approaches would be needed, the trustees said in the report.

The longer Congress waits to intervene, the more drastic payroll tax increases or benefit cuts to maintain solvency would need to be. Waiting until 2034 would require a 4.27 percentage point increase to Social Security payroll taxes, bringing the total to 16.67 percent, a 25.8 percent cut to benefits, or a combination of the two to maintain solvency.