Outlook For Social Security Trust Fund Worsens

The latest estimates say the Social Security trust fund will run out of money earlier than previous estimates.

In 2022, the Trustees of Social Security and Medicare projected that the Social Security retirement trust fund would run out of money in 2034. I said at the time that estimates and assumptions used in the projection were too optimistic.

Recently, the Congressional Budget Office (CBO) issued its own projections as part of its annual federal budget estimates.

The CBO estimates that the retirement trust fund will run out of money in 2032 or early in 2033. Spending from the trust fund will increase 6% annually while income to the trust increases only 4% per year.

The CBO also estimates that the Medicare trust fund that pays for hospital expenses will run out of money in 2030. That’s three years later than projected last year.

In other parts of the budget forecast, CBO estimates that outlays for Social Security and Medicare will increase steadily as the population ages and more Baby Boomers join the programs.

Over time, the two programs will absorb greater percentages of the federal budget than they do today

Congress eventually will have to take actions to make these programs solvent through some combination of tax increases and benefit reductions. Otherwise, the Social Security Administration will be required to make automatic across-the-board benefit cuts of 20% to 25%.

We can’t know the actions Congress will take. As I’ve said in the past, I believe people who already are receiving benefits or within a few years of receiving benefits at the time the changes are made are likely to be exempt from changes, except perhaps for those with high incomes.

But current and future retirees should be sure their spending plans have flexibility. They should be prepared for reductions in benefits. The maximum benefit reduction in Social Security would be 25%.

At some point, the payroll tax is likely to be imposed on those making more than $400,000 annually. Currently, it is imposed on incomes up to $160,200. But increasing the wage base wouldn’t close much of the shortfall.

The President’s latest budget proposal also calls for increasing the Medicare payroll tax from 3.8% to 5% on those earning more than $400,000 annually.

Most analysts expect Congress eventually will make some combination of tax increases and benefit reductions.

Congress could take another route. It could move away from trying to maintain Social Security as a self-supporting, separate program. Instead, it could make a few benefit and tax changes but provide that deficits in the programs will be financed from general revenues and overall tax increases. That would minimize the benefit changes but add to the federal budget deficits.