Medicare Will Be Insolvent In 2026, Sooner Than Expected; Social Security To Follow In 2034

Medicare's trust fund has just eight more years of solvency until 2026, and Social Security will be exhausted in 2034, according to Thursday projections by the trustees for the government programs. 

While Social Security's expected depletion is unchanged from last year's projection, the date for Medicare's demise was moved up three years. 

Social Security is made up of several funds; the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) are combined for the designation OASDI, while Medicare's Hospital Insurance trust fund is designated HI. 

If allowed to expire, beneficiaries would face an immediate reduction of around 20% in benefits.

The costs of Medicare and Social Security will increase substantially as a percentage of GDP through 2035 due to a sharp rise in beneficiaries as baby-boomers retire, and lower birth rates that have persisted since the baby boom resulting in slower growth of the labor force and GDP. 

Social Security’s annual cost as a percentage of GDP is projected to increase from 4.9 percent in 2018 to about 6.1 percent by 2038, then decline to 5.9 percent by 2052 before generally rising to 6.1 percent of GDP by 2092. Under the intermediate assumptions, Medicare cost rises from 3.7 percent of GDP in 2018 to 5.6 percent of GDP by 2035 due mainly to the growth in the number of beneficiaries, and then increases further to 6.2 percent by 2092. The growth in health care cost per beneficiary becomes the larger factor later in the valuation period, particularly in Part D.

Over 62 million retirees, disabled workers, spouses and surviving children are tapping into Social Security benefits with an average monthly benefit of $1,294 for all beneficiaries. Medicare, meanwhile, provides health insurance to around 60 million people - most of whom are over the age of 65. 

The revised dates for Medicare's demise raises the chances of a major fiscal battle facing Congress. 

The individual tax cuts implemented as part of the GOP tax overhaul are also set to expire at the end of 2025, meaning that lawmakers could have to navigate major changes in federal taxing and spending in short order, just as they did with the 2012 “fiscal cliff.”

Over a long time frame of 75 years, the hypothetical combined Social Security trust fund faces a shortfall of around $13.2 trillion, up from $12.5 trillion last year. -Washington Examiner

Closing the gap would require an immediate hike in the payroll tax of 2.78% to 15.18% or an immediate reduction in current benefits of 17%, according to the Trustees. 

If there's a silver lining in the report, it's that fewer people are applying for and receiving disability insurance through Social Security while the economy improves. Perhaps this will help the disability insurance fund last past its projected demise in 2032