With significant shortfalls looming in both Social Security and Medicare Trust Funds, political inaction is likely to mean that fixes are that much more costly and controversial, say two former trustees of the Social Security Administration, who reported on the financing issues this week despite leaving their posts.
As much as 23 percent of Social Security benefits and 14 percent of Medicaid benefits could disappear by 2034 unless Congress acts, say the former public trustees Charles P. Blahous III and Robert D. Reischauer, who partnered with the Bipartisan Policy Report to release their trustee report. Congress has yet to replace the two trustees, who resigned their posts in 2015.
Without a political fix, future retirees could experience a 23 percent reduction in benefits or a 20 percent increase in payroll taxes to fund the shortfalls, the trustee analysis says.
“As these respective trust funds near depletion, their deficits will become larger and more difficult to correct,” Reischauer says. This is especially true for Social Security, for which 23 percent of benefits would lack financing at the point of combined trust fund depletion in 2034, gradually increasing to 27 percent over 75 years. The Medicare Hospital Insurance (HI) program faces a long-range shortfall equal to 14 percent of its projected costs, the report found.
Taxpayers already pay $267.90 in monthly premiums starting at $107,001 in income, compared to $134 monthly for those earning $$85,000 or less.
"It’s very likely that higher-income clients—however Congress defines that—are going to pay the price for this in terms of reduced benefits, higher taxes or both,” says Scott Hanson, founder of Hanson McClain Advisors.
“We hear a lot of talk in our industry about advising clients to wait until age 70 to start taking Social Security benefits, which completely ignores that payments could be reduced,” Hanson says. “If people are looking at any other security like a bond, they would factor in the potential for smaller payments. But for some reason with Social Security our industry completely ignores it.”
In an ideal world, retirees would completely be able to self-fund their retirement, but in the real world Hanson advises only those clients “who haven’t done a great job saving, who will be reliant on Social Security to delay as long as possible. We tell clients who have done a good job to begin Social Security benefits as soon as possible."
“For 25 years I’ve been encouraging people to save and plan for retirement like Social Security wouldn’t be there,” Hanson adds.
Political fixes are scarce and likely to be as controversial as they are expensive. “The payroll tax increases now required to stabilize Social Security OASDI and Medicare HI finances likely already exceed the amounts that would be deemed broadly acceptable in any bipartisan compromise solution,” the trustee report says. “An example of this truth is the compromise package developed by the BPC’s Commission on Retirement Security and Personal Savings, which contains tax provisions that include an increase in the Social Security payroll tax to 13.4 percent and a hike in the cap on taxable wages from its current $127,200 to approximately $200,000 by 2020. Yet even these substantial tax increases would together have closed only roughly half of the program’s actuarial imbalance.”