In our previous blog, we discussed the SECURE 2.0 Act and the various aspects of retirement planning that its legislation will cover. We will now discuss what the SECURE 2.0 Act fails to address: specifically, funding for Social Security.
Social Security is funded by two trust funds: Disability Insurance (DI) and Old Age & Survivors Insurance (OASI). DI covers eligible disabled workers and their spouses and children. OASI covers old-age retireesandtheir spouses and children. It also covers the surviving spouses and children of deceased insured workers. OASI and DI trust funds are sustained by surplus payroll taxes, which have a taxable rate of 6.2%, and self-employment taxes, which have a taxable rate of 12.4%. Together, they make up a combined Old Age, Survivors & Disability Insurance (OASDI) fund, more commonly known as Social Security.
Recently, there have been growing concerns regarding the fiscal solvency of the Social Security system. Social Security has been in a deficit since 2021 – it has been paying out more than it receives back in revenue. To make up for the growing deficit, Social Security has begun to use its reserve of Treasury securities, which reached a maximum of $2.9 trillion in 2021 before it began to undergo depletion. The OASI, which is the larger of the two funds, will come under increasing pressure over the years. As of 2024, the OASI fund is expected to pay benefits in full until 2033. The larger OASDI trust fund is expected to be depleted in 2035.
The DI, however, is still projected to be sufficient in funding for the foreseeable future. This is due to the projected decrease in disability claimants during the 75-year timeframe. Medicare Part A benefits, geared for hospital patients, will be fully covered through 2031 and will decline to 81% by 2047, but will go back to 96% at the end of the 75-year timeframe. Medicare Parts B and D, meanwhile, will continue to fully insure eligible beneficiaries during this period.
It is important to mention that the OASI will never completely run out of funds, contrary to misconceptions. Based on current estimates, the OASI will cover 83% of the expected benefit amount in 2033, the first year that OASI will no longer fully cover benefits. This share will steadily shrink to 73% by 2098, the end of the 75-year timeframe (from 2023) used by the Social Security Department. Regardless, this is still a major cause for concern.
The increasing depletion rate of the OASDI trust funds can be attributed to several factors. Firstly, the United States is experiencing a significant rise in retirees, primarily from the Baby Boomer generation. Concurrently, there is a decline in the number of American taxpayers, which limits the capacity to support the growing demand for Social Security. This demographic shift places a heavier burden on Social Security, as current tax revenues are insufficient to meet the escalating needs. Furthermore, retirees are living longer, resulting in prolonged usage of Social Security benefits, which adds additional strain on the trust funds.
Given the uncertainties and shortcomings associated with Social Security, your ideal retirement plan should be diversified and should have supplemental sources of income to sustain your lifestyle. We recommend that you schedule a call or email us to explore alternative investment options to secure your retirement.
References:
Investopedia: How Secure Is Social Security?.
Policy Basics: Understanding the Social Security Trust Funds.
May 2024 Summary: Actuarial Status of the Social Security Trust Funds