Is Social Security Going Broke?
When it comes to the Social Security program, there’s a persistent alarm from both the government and the media, warning that the system is on the verge of going broke. These claims suggest that Social Security could run out of funds sooner rather than later.
Data from the Trustees of Social Security seems to support this assertion, alongside the warnings of numerous financial experts. However, a deeper dive into the information reveals a surprising reality: Social Security is not really “going broke.”
Social Security going broke and the data:
Each year the Social Security Board of Trustees (SSBT) publishes a report on the program’s economic health. In 2022, the report appeared to confirm the familiar story—Social Security is facing financial challenges.
In fact, the SSBT Report highlights that the operating expenses to run the Social Security program will increase by 5.42% annually while payroll tax revenue —the primary source of funding—will only increase by 3.80% over the next nine years.
Adding to this challenge is the country’s steadily declining fertility rate. The Trustees project that the fertility rate will hover at around 1.99% in the future.
A lower fertility rate means fewer people entering the workforce, resulting in fewer payroll tax contributions to support the program as the current population ages out of the workforce and begins drawing benefits.
It truly does appear that is just a matter of time before the Social Security program does go bust as the country will simply not have enough people to fund the system (think why immigration is unchecked right now).
As you can see the problems contributing to the demise of Social Security are stacking up and if you dig a little deeper into the data there seems to be some other force that began in the 1990’s that is steering the program to insolvency too.
The other force the Social Security Trust Fund management
The Social Security Trust Fund is a reserve of money collected from payroll taxes that is used to pay benefits to retirees, disabled workers, and their families.
The Trust Fund holds any surplus funds and invests them in U.S. Treasury securities to help cover future benefit payments.
The problem:
The rate of return on these funds in the Trust Fund of Social Security has dropped on a consistent basis annually.
Since 1996 the rate of return on assets held in Social Security’s Trust Fund never grew from the previous year, in fact every year for 27 years it dropped by an average of 0.17%.
Yes, you are reading that right – over the span of at least 27 years the rate of return on assets held in the Trust Fund decreased every year.
To highlight this somewhat impossible feat, unless you were trying, below is simple chart breaking down just a few years that show the consistent decrease in the rate of return on assets held in the Trust Fund:
|
Year |
Assets (Billions) |
Interest Earned (billions) |
Return |
|
1996 |
$567.0 |
$38.7 |
6.83% |
|
2001 |
$1,212.5 |
$72.9 |
6.01% |
|
2006 |
$1,844.3 |
$91.8 |
4.98% |
|
2011 |
$2,524.1 |
$106.5 |
4.22% |
|
2016 |
$2,801.3 |
$87.0 |
3.11% |
|
2022 |
$2,666.6 |
$61.4 |
2.30% |
The future projections, which are not much better, are as follows:
|
Year |
Assets (Billions) |
Interest Earned (billions) |
Return |
|
2023 |
$2,517.4 |
$54.2 |
2.15% |
|
2024 |
$2,342.6 |
$49.0 |
2.09% |
|
2025 |
$2,132.9 |
$44.6 |
2.09% |
|
2026 |
$1,893.5 |
$41.3 |
2.18% |
|
2027 |
$1,611.0 |
$37.8 |
2.35% |
|
2028 |
$1,277.1 |
$32.2 |
2.52% |
|
2029 |
$888.2 |
$24.8 |
2.79% |
|
2030 |
$441.0 |
$16.5 |
3.74% |
From the charts above you can see that even though the country was in the midst of the greatest bull market in the history of the Stock Market, the federal government got a lower and lower rate of return each and every year.
As bleak as things may look, even with the poor management Social Security is not going to go broke
Why Social Security is not going and will not go broke:
The simplest answer as to why Social Security is not going and will not go broke is Medicare.
Over the years the federal government, through Congress, has enacted key pieces of legislation that tie the two programs together and ensure that Medicare will be the savior of Medicare
These regulations are:
Regulation #1. You must enroll into Medicare when eligible to receive your Social Security benefit.
By law, for you or anyone else to receive Social Security benefits you must be at least 62 years of age, have applied for benefits and you are fully insured in terms of health coverage.
- This means if you are retired and are 65 years of age or older you must have Medicare.
- Failure to enroll into Medicare results in the immediate forfeiture of all Social Security benefits unless you are insured under another qualified health plan.
Regulation #2. Medicare premiums for Parts B and D are based solely on your income and the more you have the more you are going to pay.
By law, through Medicare’s Income Related Monthly Adjustment Amount (IRMAA) if your modified adjusted gross income (MAGI) exceeds certain thresholds for a given year your Medicare Part B and D premiums will be increased.
- MAGI is everything on lines 2a and 11 of the 2024 IRS tax-form 1040.
Regulation #3: The bulk of your Medicare premiums and any IRMAA surcharges you receive are automatically deducted from any Social Security benefit you receive.
By law, if your Social Security benefit does not cover your Medicare costs you will receive a bill in the mail.
- Medicare premiums are projected to inflate by at least 6.00% over the next 8 years.
- The Social Security cost of living adjustment (COLA) is expected to inflate by 2.40% over the next 8 years.
- Do the math.
The Reality of Medicare and IRMAA:
According to the Medicare Board of Trustees (MBT) in 2023 there will be about 54.8 million people enrolled into Part B who will also be receiving Social Security benefits.
The Trustees are also projecting that out of these 54.8 million people in Part B that just over 5 million of them will be subject to IRMAA.
These 5 million people are expected to pay an extra $20 billion in IRMAA surcharges for the year while also paying over $108 billion in Part B premiums.
This is a total of over $129 billion which all comes directly out of the benefits that Social Security is obligated to pay.
Therefore, with Medicare premiums and IRMAA Social Security doesn’t have to pay out the total obligation as Part B premiums and IRMAA surcharges will reduce those benefits.
The better news for Social Security, but not for you, is by 2031 the numbers of Medicare enrollees is expected to increase as more people are expected to retire. This phenomenon of more people retiring will speed up the process of saving Social Security.
In 2031 there will be a projected 65 million people enrolled into Medicare Part B who are also receiving Social Security.
Of these 65 million people at least 13 million of them are projected to be subjected to IRMAA.
These 13 million people will pay an extra $63.8 billion in IRMAA surcharges while also paying $212.5 billion in Part B premiums.
At least $276 billion will be deducted automatically from Social Security benefits in 2031 which does not include any reduction in benefits from those who choose to pay for their Medicare Part D or Medicare Advantage premiums through Social Security.
Since Social Security will be paying out less and less in benefits annually it will be able to keep more of the assets in the Trust Fund that were earmarked to help offset the difference between its Income and Operating Expenses.
A breakdown of the Trustees intermediate projections that do not include Medicare and IRMAA:
|
Year |
Total Income |
Operating Expenses |
Difference |
|
2023 |
$1,100,800,000,000 |
$1,169,800,000,000 |
-$69,000,000,000 |
|
2024 |
$1,144,900,000,000 |
$1,244,800,000,000 |
-$99,900,000,000 |
|
2025 |
$1,195,700,000,000 |
$1,332,700,000,000 |
-$137,000,000,000 |
|
2026 |
$1,257,700,000,000 |
$1,414,700,000,000 |
-$157,000,000,000 |
|
2027 |
$1,313,400,000,000 |
$1,499,700,000,000 |
-$186,300,000,000 |
|
2028 |
$1,370,300,000,000 |
$1,591,100,000,000 |
-$220,800,000,000 |
|
2029 |
$1,427,000,000,000 |
$1,685,200,000,000 |
-$258,200,000,000 |
|
2030 |
$1,482,700,000,000 |
$1,781,900,000,000 |
-$299,200,000,000 |
|
2031 |
$1,539,400,000,000 |
$1,881,000,000,000 |
-$341,600,000,000 |
The breakdown of the Trustees projections with IRMAA surcharges and Medicare Part B premiums:
|
Year |
Total Income (billions) |
Operating Expenses (billions) |
Total Medicare (Billions) |
Difference (billions) |
Interest Rate |
Added to Income (billions) |
|
2023 |
$1,101 |
$1,169.8 |
$129.1 |
$60.1 |
2.15% |
$61.4 |
|
2024 |
$1,206 |
$1,244.8 |
$141.9 |
$103.4 |
2.09% |
$105.5 |
|
2025 |
$1,301 |
$1,332.7 |
$167.3 |
$135.8 |
2.09% |
$138.7 |
|
2026 |
$1,396 |
$1,414.7 |
$175.1 |
$156.8 |
2.18% |
$160.2 |
|
2027 |
$1,474 |
$1,499.7 |
$195.1 |
$169.1 |
2.35% |
$173.1 |
|
2028 |
$1,543 |
$1,591.1 |
$213.6 |
$165.9 |
2.52% |
$170.1 |
|
2029 |
$1,597 |
$1,685.2 |
$233.9 |
$145.9 |
2.79% |
$149.9 |
|
2030 |
$1,633 |
$1,781.9 |
$253.6 |
$104.4 |
3.74% |
$108.3 |
|
2031 |
$1,648 |
$1,881.0 |
$276.2 |
$43.0 |
|
|
So, is Social Security really going broke?
The answer, for at least the short term (2023 – 2031) is a resounding NO if you apply actual federal law into the equation.
Now, if those responsibilities of Social Security in terms of collecting Medicare premiums and IRMAA are neglected then the answer is of course YES, it is going broke, and taxes need to be raised immediately.
But is Social Security going broke in the long term?
With the realization that IRMAA is going to save the Social Security program at least in the near term there is still the issue of the country’s dwindling fertility rate coupled with the growing rate of people reaching retirement.
It is just a matter of time when a disproportionate amount of people will be collecting Social Security benefits verses a much smaller amount of people paying taxes to fund the system. This would mean that yes, the Social Security program should go broke, but, again, thankfully, there is still IRMAA
To save Social Security over the long term all that needs to be done is:
- Increase Medicare premiums at a slightly higher rate of inflation than the projected 6.46% rate.
- Or lower the IRMAA Threshold to entrap even more people.
- Or increase the surcharges to make those in IRMAA lose more of their Social Security benefit.
- Or do all three every year going forward.
Given the past track record of the federal government when it comes to generating revenue off the backs of the U.S. taxpayer to keep a program viable it would appear that the 4th option is the one that will most likely be applied.
For those of you who still don’t believe that Social Security is not going broke:
Here is a chart from the Congressional Budget Office (CBO) that was published back in 2007 which ironically was the first year that IRMAA was implemented.
The above chart depicts how Medicare/Medicaid, Social Security and the overall Budget will perform through at least 2072.
As you can see as Medicare/Medicaid increases over time the Budget and Social Security remain steady.
The CBO knew back in 2007 that for Social Security and the Budget to remain steady all that was needed was for Medicare to increase in costs.
As people pay more for Part B premiums and IRMAA surcharge less will be paid out by Social Security while the federal government and the media can continue to convince you that your taxes must be raised to save all 3 of them.
It would appear the federal government is banking on you not planning for IRMAA!
