Broker Check

Social Security Trustee Report Summary

Social Security and Medicare Face Financial Challenges

Most Americans will eventually receive Social Security and Medicare benefits. Each year, the
Trustees of the Social Security and Medicare Trust Funds release lengthy reports to Congress that
assess the health of these important programs. The newest reports, released on April 22, 2020,
discuss the current financial condition and ongoing financial challenges that both programs face,
and project a Social Security cost-of-living adjustment (COLA) for 2021.

How Social Security and Medicare will be affected by the COVID-19 pandemic is still uncertain; the
Trustees acknowledge that the estimates and analysis included in the reports do not reflect the
potential effects.

Social Security Trust Funds

The Social Security program consists of two parts, each with its own financial account (trust fund)
that holds the Social Security payroll taxes that are collected to pay Social Security benefits.
Retired workers, their families, and survivors of workers receive monthly benefits under the
Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly
benefits under the Disability Insurance (DI) program. The combined programs are referred to as
OASDI. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax
revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the
current year to pay benefits and administrative costs is invested (by law) in special Treasury
bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social
Security Trust Funds have built up reserves that can be used to cover benefit obligations if
payroll tax income is insufficient to pay full benefits.

Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) Trust
Funds. However, these projections are hypothetical, because the trusts are separate, and generally
one program's taxes and reserves cannot be used to fund the other program.


Highlights of Social Security Trustees Report

  • Social Security's total cost is projected to be less than its total income in 2020 and higher
    than its total income (including interest) in 2021 and all later years. The U.S. Treasury will need
    to withdraw from trust fund reserves to help pay benefits. The Trustees project that the
    hypothetical combined trust fund reserves (OASDI) will be depleted in 2035, the same as projected
    in last year's report, unless Congress acts.
  • Once the hypothetical combined trust fund reserves are depleted in 2035, payroll tax revenue
    alone should still be sufficient to pay about 79% of scheduled benefits initially, with the
    percentage falling gradually to 73% by 2094.
  • The OASI Trust Fund, when considered separately, is projected to be depleted in 2034, the same
    as projected in last year's report. Payroll tax revenue alone would then be sufficient to pay 76%
    of scheduled benefits.
  • The DI Trust Fund is expected to be depleted in 2065, 13 years later than projected in last
    year's report. For a second year in a row, the depletion date has changed significantly, reflecting
    the fact that both benefit applications and the total number of disabled workers currently
    receiving benefits have been declining over the past few years. Once the DI Trust Fund is depleted,
    payroll tax revenue alone would be sufficient to pay 92% of scheduled benefits.
  • Based on the "intermediate" assumptions in this year's report, the Social Security Administration is
    projecting that the cost-of-living adjustment (COLA), which will be announced in the fall of 2020, will be
    2.3% (last year's report projected a COLA of 1.8% and the actual COLA was 1.6%). This COLA would
    apply to benefits starting in January 2021.

Medicare Trust Funds

There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund helps pay for hospital care
(Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate
accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one
covering Medicare Part D (which helps cover the prescription drug benefit).

Highlights of Medicare Trustees Report 

  • Annual costs for the Medicare HI Trust Fund exceeded tax income each year from 2008 to 2015. There
    were small fund surpluses in 2016 and 2017. In 2018 and 2019, expenditures exceeded income, and
    deficits are expected for all later years.
  • The HI Trust Fund is projected to be depleted in 2026, the same year as projected in last year's report. Once the HI Trust Fund is depleted, tax and premium income would still cover 90% of estimated program costs, declining to 78% by 2044 and then gradually increasing to 90% by 2094. The Trustees note that long-range projections of Medicare costs are highly uncertain because the health-care landscape is shifting and the effects are unknown.

Why are Social Security and Medicare Facing Financial Challenges?

Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of
demographic and economic factors, including higher retirement rates and lower birth rates, there will be
fewer workers per beneficiary over the long term, worsening the strain on the trust funds.

What is Being Done to Address These Challenges?

Both reports continue to urge Congress to address the financial challenges facing these programs soon, so
that solutions will be less drastic and may be implemented gradually, lessening the impact on the public.
Combining some of the following solutions may also lessen the impact of any one solution.

  • Raising the current Social Security payroll tax rate (currently 12.40%). According to this year's report, an
    immediate and permanent payroll tax increase of 3.14 percentage points to 15.54% would be necessary
    to address the long-range revenue shortfall (4.13 percentage points to 16.53% if the increase started in
    2035).
  • Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($137,700 in
    2020).
  • Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or
    later).
  • Reducing future benefits. According to this year's report, to address the long-term revenue shortfall,
    scheduled benefits would have to be immediately and permanently reduced by about 19% for all current
    and future beneficiaries, or by about 23% if reductions were applied only to those who initially become
    eligible for benefits in 2020 or later.
  • Changing the benefit formula that is used to calculate benefits.
  • Calculating the annual cost-of-living adjustment for benefits differently.

You can view a combined summary of the 2020 Social Security and Medicare Trustees Reports and a full
copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

________________________________________________________________________________________________________________

Securities offered through Royal Alliance Associates, Inc. (RAA), member FINRA/SIPC. Investment advisory services
offered through Focus Financial. RAA is separately owned and other entities and/or marketing names, products or
services referenced here are independent of RAA.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information
presented here is not specific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a
taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent
advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available
information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The
information in these materials may change at any time and without notice.