When Will Social Security Run Out? Coronavirus Accelerates “Doomsday” to 2028
So, when will Social Security run out? What about Medicare?
Social Security and Medicare have been on shaky ground for years, but the impact of the COVID-19 crisis may be accelerating their financial woes. The chances are increasing that you will see your benefits diminished.
Keep reading to get informed about the situation and find ideas for protecting your retirement financial security.
When Will Social Security Run Out? Projections Now Suggest Insolvency by 2028
First, it is important to note that Social Security will not actually run out of money. However, the money being brought into the program will soon not be enough to cover the benefits being paid out and most people refer to this as “running out of money.” And, the deficits in the program may cause benefits to be cut.
A new report from the Bipartisan Policy Center (BPC), a Washington D.C.-based policy think tank, suggests that Social Security will run out of money in 2028, a full eight years sooner than the Social Security and Medicare Trustees had suggested before the pandemic and subsequent economic meltdown. (Earlier this year, the Trustees announced that The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, would be able to pay scheduled benefits on a timely basis only until 2034.)
What is the Problem? Why is Social Security in Trouble?
Social Security is funded by payroll taxes. With record numbers of Americans out of work due to the pandemic, Social Security has far less revenue coming in.
According to the Bureau of Labor Statistics, unemployment in April 2020 rose to 14.7 percent, and nonfarm payrolls fell by 20.5 million. That grim statistic doesn’t show the full damage:
Wages Reduced: Wages are down. So, even those working are paying less Social Security tax.
Tax Thresholds Lower: Fewer people are meeting income thresholds for taxes, meaning less tax revenue.
Interest Rates: Interest rates have been slashed, which lowers the yield on bonds held by the Social Security trust funds.
The investments that the Social Security fund makes — mostly U.S. bonds — will lose their yield as the Federal Reserve keeps interest rates low for possibly years to come in order to prop up the economy.
Social Security Disability: More people are filing for Social Security disability — causing additional financial outlay by the program.
Earlier Retirement Claiming: Many workers who were close enough to take early retirement at 62 may have been laid off and worry they won’t be able to get another job. For them, the loss of income later in life for taking early retirement is offset by their need for present income.
In all, it’s a perfect storm to further cripple the struggling Social Security situation.
Social Security Woes Before Coronavirus
The Great Recession and now the Pandemic Depression have sped up what was an unsustainable trend: Older Americans are living longer, and younger Americans are not having families until later — if at all. As the Congressional Research Service said in its 2019 report Social Security: Demographic Trends and the Funding Shortfall, “The combination of decreasing fertility and longer life expectancies results in higher costs…. As costs remain above income, the trust funds’ assets are used to fulfill scheduled monthly benefit payments.”
Explore what changed with Social Security and Medicare going into 2020
Medicare’s Hospital Insurance Trust Fund Could Be Out of Reserves by 2023
Medicare’s situation may be even worse.
The Trustees reported that Medicare’s reserves may run out by 2026. That’s because Medicare was also in poor shape before the pandemic hit, and the short-term costs of the crisis, estimated to be as much as $115.4 billion, could be the straw that breaks the camel’s back.
The same problems exist for Medicare as Social Security: fewer people paying in and more people getting benefits. However, there is also the fact that medical costs have risen dramatically and Medicare payouts are sizable.
Medicare’s Hospital Insurance Trust Fund can pay scheduled in-patient hospital expenses until 2026.
However, Trump administration officials have reported that if widespread unemployment persists over the full 2020 year, those depletion dates will move forward.
And, under a “high-cost” scenario, the Medicare hospital trust fund would be depleted in 2023. That is just three years from now.
What Does All of This Mean to You? Will You Still Get Benefits When Social Security Runs Out?
The depletion of Social Security and Medicare reserves does not mean that your benefits will stop altogether.
Given the pre-pandemic projections, tax revenues would allow:
- Social Security to pay 79% of scheduled benefits in 2035
- And, Medicare could pay 90% of total hospital insurance benefits in 2026
However, given the severity of the pandemic economic crisis, it may be wise to assume that greater reductions at an earlier date are possible.
But Wait, I Funded These Programs With Taxes! This is My Money!
Yes and no.
Yes, you paid into the program, but Social Security is not a retirement savings program. It’s more like a pension. The people paying in now through payroll taxes are paying for today’s retirees. When you retire, younger workers will be paying it forward for you. In fact, you probably have paid less in taxes than you are going to get out in benefits.
Medicare: According to a 2015 report by The Urban Institute, an average couple who turned 65 in 2015 will receive $422,000 in Medicare benefits even though they only paid $140,000 in taxes toward the program. (A couple turning 65 in 2030 will likely receive $621,000 in benefits even though they have only paid $179,000 in taxes.)
Social Security: The Urban Institute has also found that Social Security also typically pays out more than people put in. Generally, married couples are more likely to get back more than they contributed as single people, and both low-income and high-income people may receive more dollars from the program over a lifetime than the amount of money they contributed to it.
Of course, the above analysis ignores the time value of money and lost opportunity cost. Social Security contributions are put into the fund over decades, not all at once. Funding Social Security this way takes the risk away from accumulating benefits, but also hampers growth opportunities.
How Can the Country Fix the Social Security and Medicare Problem?
Whether or not your benefits will be cut in the future is entirely dependent on who is elected to Congress and the presidency and how they choose to fix the problems.
Fixing the deficits will not be easy. A few of the more obvious solutions include:
- Increasing taxes
- Cutting benefits for everyone
- Reducing benefits for high earners
- Only reducing benefits for future recipients, not current
- Raising the age when you can start benefits
- Increasing the number of tax payers through delayed retirement, increased immigration or increasing the birthrate (this is why some countries subsidize children)
The AARP has a detailed discussion of these and other proposals.
How to Protect Your Own Retirement
No matter what happens with Social Security and Medicare, you need a strong and well documented retirement plan — one that you can maintain and update as your own finances evolve. Given the perilous economic situation, this is more true now than ever before.
Create a Detailed Plan: The NewRetirement Retirement Planner is an extremely detailed tool that can help you set goals for retirement, find possibilities for achieving those goals and keep track of your progress. Get started today.
Maximize Your Social Security Benefits: Try different start ages and benefit amounts and review your cash flow and out of money ages.
Plan for Medical Expenses: Medicare does not cover nearly all of your medical expenses. The NewRetirement Planner helps you estimate your lifetime out of pocket costs so can have a more reliable plan.