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Retirement Planning > Social Security > Social Security Funding

Social Security, Medicare Face Urgent Challenges in 2021

By Ginger Szala

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What You Need to Know

  • One immediate concern is the fate of Americans born in 1960.
  • A change in the benefits formula could slash their benefits.
  • The Medicare Part A hospitalization trust fund could run dry in 2024.
An hourglass (Image: Shutterstock)

As more baby boomers retire and claim Social Security, the worries about the federal program grow, especially in the midst of the coronavirus pandemic, slowing economy and fewer people working to help pay for the program.

We asked several experts their thoughts on what could be expected about Social Security and Medicare next year, other than the planned 1.3% cost-of-living adjustment.

Political Hurdles

Morningstar’s head of retirement research, David Blanchett, who also provided predictions on the future of retirement income planning, told ThinkAdvisor that he believes the Biden administration will look to fund gaps in both programs, but due to the pandemic and its economic effects, he’s not sure there’s going to be the political will to enact any changes.

“Every year (or day) we, as country, wait to address the issue, the more expensive fixing it becomes, but whatever the fix is, it isn’t going to be easy (or painless),” he said.

“Either it’s going to entail cutting benefits, raising taxes, waiting to get benefits longer, or likely some combination of those, but there’s going to be a decent amount of pain spread across some relatively large number of U.S. citizens,” he added. “Therefore, it’s probably not exactly something that would be regarded as a top priority among many Americans and not something immediately addressed.”

Likewise, Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, an advocacy group, said the House of Representatives was “likely to take action on Social Security in the 117th Congress,” especially as there’s a “significant” overlap between President-elect Joe Biden’s proposal and the Social Security 2100 Act, sponsored by Rep. John Larson,D-Conn.

However, he said, “Social Security legislation is going to be a heavier lift in the Senate, where any changes in the law require a minimum of 60 votes.”

The ‘Notch’

Richtman added that his group hopes Congress will at least fill the “notch” in Social Security benefits for workers who turned 60 in 2020.

Social Security benefits are based on a worker’s 35 highest years of earnings, which are then indexed to the growth in average wages until the year the worker turns 60. However, those who turned 60 in 2020 could see benefits reduced due to the economic downturn and a drop in the index.

“We also are pressing lawmakers to lessen the burden on workers who are required to repay payroll taxes deferred by an executive order from President Trump last summer,” he said.

Nancy J. Altman, president of the advocacy group Social Security Works, predicts that “the legislation to expand Social Security will be voted out of the [House] in the next Congress and could even get signed into law.” She also says progress is likely on expanding Medicare.

One reason: The need to fix the “notch” will force action on Social Security. “Either a Democratic expansion bill will be enacted or Senate Republicans will block it,” she said. “If Republicans block it, Democrats will have a major campaign issue in 2022” during midterm elections.

Funding Shortfalls

Mary Johnson, The Senior Citizens League Social Security and Medicare policy analyst, had several predictions.

She expects that continued low inflation will mean the 2022 COLA will also be low, despite price jumps in various household expenditures such as some food, home repair supplies and services and Medicare supplemental insurance.

She also sees a significant drop in the payroll tax revenue that funds Social Security and Medicare Part A Hospital Insurance. This makes Biden’s plans to increase Social Security benefits and improve the COLA more challenging, she said.

The Social Security trust fund is expected to take in $823 billion in 2021, while expenditures are projected by the Congressional Budget Office to be $949 billion in 2020, she noted.

However, “doing nothing to address Social Security’s solvency is not an option,” she said.

The CBO estimates that tax revenues would need to increase by 2.6 percentage points just to match the outlays for 2021. But raising taxes and cutting benefits “would be the exact opposite of what we need to get out of a major recession,” she said. “Getting people back to work and payroll taxes flowing again will need to occur first to fund any benefit expansion.”

The Medicare Part A Problem

The Medicare Part A trust fund needs immediate attention, Johnson said, explaining that never in the past 26 years has Medicare Part A “been so close to insolvency.” In fact, the CBO says that Medicare Part A hospital insurance will run short by 2024.

“Fixing Medicare Part A would include raising revenues, and it could potentially mean shifting more costs to beneficiaries or reducing access to some services,” Johnson said.

“Hospitals have been stretched to their limit due to COVID-19, thus cutting reimbursements to hospitals may not be feasible. That leaves shifting some Part A costs to Part B, which would increase what beneficiaries pay for premiums, and revenue increases.

“In the past, Congress addressed Part A funding in massive bills such as the 2010 Affordable Care Act,“ she said, adding that the group would “be watching for similar comprehensive health care bills in the next Congress.”

Expect Retirement System Stress

When asked what he saw for 2021 developments in the retirement area, Ted Benna, who often is dubbed “the father of 401(k)s,” believes that investment returns in 2021 will be “at least as tumultuous” as they were in 2020.

“Every type of public and private retirement program is dependent on strong investment returns through the entire decade. Avoiding a severe bear market is unlikely and it could begin during 2021. Whenever it happens, the stress placed on all retirement systems will be huge,” he told ThinkAdvisor in an email.

“Political action is likely to be another major issue,” he continued. ”Roth after-tax arrangements rather than pre-tax savings are likely to be a top priority because more taxes are needed now at both the state and national level. This will probably also include more Roth-IRA mandates.”

— Related on ThinkAdvisor:

Ginger Szala

@gingerszalaink

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