2023 Medicare and Social Security Trust Fund Updates

Hi folks,

Today, we're primarily going to be discussing Social Security, the benefit that our retirees currently enjoy. Generally speaking, payroll taxes make up a large portion of the Social Security Trust Fund, which amounts to 6.2% of gross income for everyone that has earnings less than $147,000 for 2022 (up from $142,800 from 2021). In 2023, the threshold has increased to $160,200. If you earn more than this amount, you owe no further tax to fund Social Security.

Since working people contribute to this account, and retirees take distributions from the account, there has been a lot of concern that as the US population ages, there may not be enough money for current contributors to realize any benefit when they are able to retire. There is some validity to this line of reasoning, but there are additional factors to consider, which includes passing of legislation and certain other changes that may occur including, but not limited to, raising of retirement age (what politician is going to do this to never get re-elected?), increase in payroll taxes (will also be unpopular, but the most likely), more people working and paying taxes (unlikely), reducing the amount of the benefit (fairly likely), etc. Potentially, the income cap could be increased or removed altogether, similar to Medicare. In 2023, this has definitely been found to be the case.

The 2021 OASDI Trustees Report (also known by its official name as 'The Annual Report of the Board Of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds') projected that the Social Security Trust Fund will be depleted in 2033 and that the Disability Insurance Trust Fund will be depleted in 2057. Interestingly, the depletion date generally looms closer and closer every year, as the SSA publishes this report annually; in 2020, the projected depletion date for the Social Security Trust Fund was 2034, and the year previous was 2035. In 2023, the depletion date is estimated at 2033, which is similar to the 2021 report. In more positive news, the Disability Insurance Trust Fund is not estimated to be depleted in the 75-year range up until EOY 2097. This and previous reports can be found at ssa.gov; the 2023 report can be here.

What does this mean for those that will be receiving Social Security benefits in the year 2033? Does this mean you can expect to collect a $0 check from the Social Security Administration? Thankfully, no. This means that inflows from payroll taxes and other sources will be enough to support 77% of the benefit according to the 2023 report. However, this is not cause for celebration; we are depleting the trust fund quite rapidly – in the next decade or so.

Is this truly a reason to be concerned, or is this just more ammunition for the news agencies to capitalize on to engage their viewership? A little bit of both, but I anticipate that Congress will act closer to the depletion date. It is unlikely that Congress will want to touch this sooner because talk of raising taxes/reducing benefits will be hugely unpopular. However, if they did address this issue proactively (wishful thinking on my part), the needed increase in tax revenue could be much smaller, which would mean a smaller tax bill for you and me. However, if you are paying attention, the annual threshold has risen quite substantially in the last few years, which has allowed the government to collect more tax revenue. Taxation has increased into higher incomes.

We don’t have enough working people and a lot of trust fund beneficiaries are depleting the account. The stable birth rate of 2 children per woman isn’t estimated to be achieved until 2056 according to the report. I am curious to see how this estimate changes over time.

Despite all this doom and gloom, interestingly, Social Security benefits have increased for 2023.

I'd like to switch our focus from Social Security to Medicare to illustrate a point. As a brief aside, the Medicare payroll tax is 1.45% with an additional 0.9% on single filers with earnings above $200k per year or joint filers with earnings above $250k per year. Similar to Social Security, the Medicare Trust Fund is also at risk of depletion. According to CMS, "The Hospital Insurance (HI) Trust Fund, or Medicare Part A, which helps pay for services such as inpatient hospital care, will be able to pay scheduled benefits until 2031, which is up substantially from the last time I reported on this. In 2031, the fund's reserves will become depleted and continuing total program income will be sufficient to pay 89 percent of total scheduled benefits." (source: https://www.cms.gov/oact/tr/2023).

It seems that Medicare is more pressing, as the depletion date is sooner than Social Security.

However, I'd like to direct your attention to the chart below, which can be found here: https://www.healthaffairs.org/do/10.1377/forefront.20201210.997063/full/.

Last time I posted, I said “You'll notice that there were several years where the fund came close to exhaustion, but inflows into the fund were increased, mostly by legislation. Will Congress rescue Medicare (and Social Security), as they always have? If I had to bet money on this, I'd say absolutely. Will this mean taxes will increase? I think that's also likely.” Both of my predictions were correct. Congress has taken corrective action through legislation, and taxes have increased.

There is a more interesting note for our physician readership. As Medicare is also responsible for funding residency positions for physicians, who are grossly underpaid as residents (less than $60k per year, according to the 2021 Survey of Resident/Fellow Stipends and Benefits), what will happen to resident stipends/salaries? Will they decrease proportionally or be unimpacted? In 2023, it seems to be roughly around $60,000 or an increase of $2,000. However, please keep in mind this is in nominal terms not adjusted for inflation.

These depletion dates are one reason why I believe you absolutely should not leave your financial solvency to the government; social security checks are not a retirement plan. The best way to secure your and your family's future is to invest in stocks, real estate, and purchase sensible insurance products while avoiding inappropriate insurance products.

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Disclaimer: The article above is an opinion and is for informational/educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The author has taken care in writing this post but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of this information.