What the New Outlook for Social Security and Medicare Means for You

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The new 2021 annual report was just released and on a positive note, the pandemic has had a smaller impact on the Social Security trust funds than many feared.

The 2021 trustee report includes extensive information about the current operations of Social Security and Medicare and provides careful analysis of their outlook. The data and projections presented in the report include the Trustees’ best estimates of the effects of the COVID-19 pandemic and the 2020 recession, which were not reflected in last year’s reports. Here are some of the major findings:

  • Effects of Pandemic: The finances of both programs have been affected by the pandemic and the recession of 2020. Employment, earnings, interest rates, and GDP dropped substantially in the second calendar quarter of 2020 and but are assumed to rise gradually toward full recovery by 2023. The Trustees also project elevated mortality rates related to the pandemic through 2023 as well as reductions in immigration and childbearing in 2021-22 from the levels projected in the 2020 reports, with compensating increases a few years later. These alterations and assumptions all impact the outlook of the programs.
  • The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2033, one year earlier than reported last year. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76% of scheduled benefits.
  • The Disability Insurance (DI) Trust Fund, which pays disability benefits, will be able to pay scheduled benefits until 2057, 8 years earlier than in last year’s report. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 91% of scheduled benefits.
  • Combining of OASI and DI funds: The OASI and DI funds are separate entities under law. The report also presents information that combines the reserves of these two funds in order to illustrate the actuarial status of the Social Security program as a whole. The hypothetical combined OASI and DI funds would be able to pay scheduled benefits on a timely basis until 2034, one year earlier than reported last year. At that time, the combined funds’ reserves will become depleted and continuing tax income will be sufficient to pay 78% of scheduled benefits.
  • 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 2026, the same year as reported last year. At that time, the fund’s reserves will become depleted and continuing total program income will be sufficient to pay 91% of total scheduled benefits.
  • Medicare Part B and Part D: The Supplemental Medical Insurance (SMI) Trust Fund has two accounts: Part B, which helps pay for services such as physician and outpatient hospital care, and Part D, which covers prescription drug benefits. SMI is adequately financed into the indefinite future because current law provides financing from general revenues and beneficiary premiums each year to meet the next year’s expected costs. Due to these funding provisions and the rapid growth of its costs, SMI will place steadily increasing demands on both taxpayers and beneficiaries.

Social Security is Not Going Broke

According to Forbes, the going-broke misconception is a top Social Security myth.

For nearly the past decade, Social Security’s trustees have warned that the retirement trust fund would be depleted in either 2034 or 2035 (the years bounce around). In the 1997 trustee’s report, the depletion year was as early as 2031. In certain other reports, it was projected to come much later, after 2050.

Congress can fix things, as it has done several times in the past. “Most of these remedies involve higher payroll taxes, benefit cuts or a combination. Higher taxes could spread across the board or focus on higher earners, for example. Benefit cuts also could be applied across the board or target high earners,” according to Forbes. “Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to report,” the trustees said in the report.

What You Can Do

Regardless of what is happening or projected to happen with Social Security, the system was never intended to cover all of your retirement needs. The typical payment to retirees is just a bit above $1,500 a month.

People have many options to shore up their personal finances to make them less reliant on Social Security. The whole field of retirement planning is tied, at least partly, to generating enough income to support a standard of living beyond what Social Security provides. So what can you do?

  • Start saving more, now;
  • Utilize tax-sheltered retirement accounts such as workplace 401(k) plans and Individual Retirement Accounts;
  • Pare down debt, especially credit cards with high interest rates, consumer loans on depreciating assets (cars and trucks), and debt incurred for other people’s benefit, such as a child’s higher education;
  • If your income is low, take a look at the Retirement Saver’s Credit, which provides a modest government retirement match, worth up to $1,000 per person, in the form of a tax credit;
  • If you have access to a Health Savings Account at work, start contributing money. These accounts offer a tax deduction upfront, while withdrawals can be taken tax-free for health costs in retirement;
  • If you’re already in good shape, with ample money in IRAs or a 401(k) plan, devise a sensible withdrawal strategy, understanding that you are not limited to taking required minimum distributions, and so long as you are at least 59 1/2, it may make sense to make significant annual withdrawals for the next five years, given today’s historically low tax 22% and 24% income tax brackets that are scheduled to disappear in 2026 (see the current tax table and the scheduled tax bracket increase table near the bottom of this page on our website), so that you minimize taxes and avoid a tax bill on some of your Social Security benefits;
  • Consider delaying Social Security to lock in higher monthly benefits that can help you avoid running out of money in old age. Keep in mind that future COLAs or cost-of-living adjustments will get tacked onto larger benefits. Many, if not most, financial experts favor delaying for as long as you can.

Plan Ahead for Retirement and Long-Term Care

Even though Social Security should continue to be viable into the future, it’s still important to plan ahead — and there is no time like the present to do so.

Besides being a Certified Elder Law Attorney, I am also an experienced retirement planning advisor and long-term care financial advisor through my affiliation with Protection Point Advisors.

Here at the Farr Law Firm, we stay on top of the strategies you need to put in place to keep yourself and your family protected. If you’ve not done Retirement Planning, Estate Planning, or Long-Term Care Planning (or had your documents reviewed in the past 5 years – or last 3 years if you’re over 65), or if you have a loved one who is nearing the need for long-term care or already receiving long-term care, please call us to make an appointment for a no-cost initial consultation:

Retirement Planning Fairfax: 703-691-1888
Retirement Planning Fredericksburg: 540-479-1435
Retirement Planning Rockville: 301-519-8041
Retirement Planning DC: 202-587-2797
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