Each year the Trustees of the Social Security and Medicare trust funds provide a report on the financial status of these programs—current and projected. The information below is from a summary of the 2016 Annual Reports www.ssa.gov, Office of the Chief Actuary, 2016 Trustees Report-Jacob J. Lew, Sec. of the Treasury and Managing Trustee, and Thomas E. Perez, Sec. of Labor, and Trustee).
general, both programs (as currently scheduled) are facing funding shortfalls.
Social Security and Medicare accounted for about 41% of Federal program
spending in 2015. Both programs will have cost growth in excess of Gross
Domestic Product (GDP) growth through the mid-2030s. This shortfall is due to:
1) growth in the aging population (baby boomers beginning retirement—about
10,000 per day) eligible for benefits, and 2) fewer employees entering the
labor market (because of lower birth rates) to fund the programs. Medicare
expenditures per beneficiary are also projected to increase above the growth in
per capita GDP over the same time period.
Security has two separate trust funds to provide benefits for two programs: 1)
Old Age and Survivors Insurance (OASI), and 2) Disability Insurance (DI).
Although the trust funds are technically separate, the Trustees typically
combine the funds to provide the actuarial financial status for the total plan.
Funding for plan benefits comes from combined payroll taxes from both employees
and employers. Current benefit payments to plan recipients are paid from these
payroll taxes and any excess payment is scheduled to be added to a “trust fund”
to provide for future benefit payments. In the 2016 report, the Trustees
project that combined fund asset reserves will exceed projected benefit costs
through 2028; benefit payments will then begin to dip into trust fund reserves.
Trustees currently project that those trust funds will be depleted in 2034.
When the funds are depleted, projected tax income is sufficient to pay about
three-quarters of projected benefits through 2090.
Medicare program also has two trust funds: 1) Hospital Insurance Trust Fund
(Part A), and 2) Supplementary Medical Insurance Trust Fund (Parts B and D).
Part A of Medicare helps pay for the cost of hospitalization, home health care
following hospital stays, skilled nursing care, and hospice care for the
elderly and disabled. Part B of Medicare helps pay for the costs of physicians,
outpatient hospitalization, and home health services. Part D subsidizes the
cost of drug coverage.
Trustees project that the Part A trust fund will be depleted in 2028 (two years
sooner than projections in the 2015 report). Part A expenditures have been
exceeding income received since 2008; at fund depletion in 2028, revenues are
projected to pay 87% of Part A costs. Parts B and D are adequately funded
because current law allows funding from both general revenues and beneficiary
premiums. However, because of an aging population and increasing health care
costs, the cost of Parts B and D are expected to grow from 2.1% of GDP in 2015
to about 3.5% of GDP in 2037. Trustee
projections in the 2016 report are that total Medicare expenditures will grow
from about 3.6% of GDP in 2015 to 5.6% of GDP in 2040. The costs are projected
to increase to about 6.0% of GDP in 2090.
The Bottom Line
Security and Medicare benefits are a key component in long range planning for
most individuals. The 2016 Trustee Report indicates that changes in these plans
will be forthcoming. Please contact us at Paragon Financial Advisors to see how
your future plans may be affected. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX. We offer financial planning and investment management services to our clients.