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The latest estimates say that the Social Security trust fund will run out of money sooner 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 by 2034. I said at the time that the estimates and assumptions used in the projection were overly optimistic.
The Congressional Budget Office (CBO) recently 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 2033. Trust fund spending will grow 6% per year, while trust income will grow only 4% per year.
The CBO also estimates that the Medicare trust fund that pays for hospital expenses will run out of money by 2030. That’s three years later than projected last year.
Elsewhere in the budget forecast, the CBO estimates that outlays for Social Security and Medicare will rise steadily as the population ages and more Baby Boomers join the programs.
Over time, the two programs will absorb larger percentages of the federal budget than they do today.
Eventually, Congress will have to take action 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 and blanket benefit cuts of 20% to 25%.
We cannot know what actions Congress will take. As I’ve said in the past, I think people who are already receiving benefits or within a few years of receiving benefits at the time the changes are made will probably be exempt from changes, except perhaps for those with high incomes.
But current and future retirees need to make sure their spending plans have flexibility. They must be prepared for reductions in benefits. The maximum reduction in Social Security benefits would be 25%.
At some point, the payroll tax is likely to be imposed on those who earn more than $400,000 a year. Currently, it is imposed on income up to $160,200. But increasing the wage base would not close much of the deficit.
The president’s latest budget proposal also calls for increasing the Medicare payroll tax from 3.8% to 5% for those who earn more than $400,000 a year.
Most analysts expect Congress to eventually do a mix of tax increases and benefit cuts.
Congress could go another way. It could move away from trying to keep Social Security as a separate, self-sustaining program. Instead, you could make some changes to benefits and taxes, but set shortfalls in programs to be funded by general revenue and general tax increases. That would minimize benefit changes but increase federal budget deficits.
