Social Security Costs to Exceed Income in 2020

Tue, Apr 30, 2019 - 9:26am

An annual government report indicated Social Security’s costs are expected to exceed its income starting in 2020. When this last happened in 1982, the 1984 Social Security fix followed where Congress raised taxes and raised the income level subject to taxation to cover the shortfall. What will happen now that we’re set to face this same issue yet again?

On a recent Financial Sense Newshour podcast, Jim Puplava and Chris Preitauer discussed what retirees and those approaching retirement need to know about Social Security and Medicare and how these programs are likely to change going forward.

For the full podcast and audio, see Social Security and Medicare Costs Expected to Soar. You can also subscribe to Financial Sense Newshour on iTunes, Spotify, Stitcher, and wherever else you listen to podcasts!

Social Security and Medicare Faltering

The 1984 fix was intended to last, but we are now facing the same problem. By next year, the program will need to draw on its $3 trillion trust fund to cover the benefit shortfall. Because the trust fund is essentially made up of IOUs, next year the Social Security trustees will have to sell Treasury bonds in the open market to pay out benefits.

The good news, Puplava noted, is that the Social Security trust fund payments were supposed to start exceeding revenues in 2018. However, due to low unemployment and a growing economy, the program took in more tax revenues in 2018 and 2019.

The date at which Social Security will need to cut benefits has been pushed out two years to 2035. If there are no changes made to the program by 2035, Social Security will only be able to deliver 75 percent of the benefits currently paid.

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Costs for both Social Security and Medicare are expected to soar in the next decade and account for the majority of U.S. budget deficits, Puplava noted. Currently both programs make up about 45 percent of federal spending, and if we add in interest on the debt, spending accounts for roughly 65 percent of all government spending.

However, this figure is projected to rise to 90 percent of the budget deficit in the next 10 years, according to the Congressional Budget Office.

“Just to give you an example of how important these programs are, last year, 52.7 million Americans received Social Security checks, 10.2 million Americans received disability checks and almost 60 million Americans were covered under Medicare,” Puplava said. “Also, Part A of Medicare—that's the part that pays for your hospital—will be depleted by 2026. By 2035 the two programs will equal 11.6 percent of GDP.”

What’s the Fix?

Nothing is really being done to address these problems, Puplava noted, and Congress is unlikely to do anything about it until a crisis occurs.

At that point, they will likely take draconian measures to fix the problem. Congress will need to raise the minimum age at which Social Security benefits kick in to account for the fact that people are now living longer.

As there are no real savings in the Social Security Trust Fund, Puplava believes Congress should adjust how investments are handled. The fund should invest money taken in excess of payments into real assets, rather than spending it, as the Canadian government handles its pension system. Congress will also likely have to increase Medicare premiums to account for the shortfall in that program.

To listen to this full podcast, see Social Security and Medicare Costs Expected to Soar. For our full archive of free and premium shows, visit our Financial Sense Newshour podcast page.

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