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April 6, 2023

When President Roosevelt signed the Social Security Act in 1935, it was intended as a temporary response to economic conditions arising from the Great Depression. Monthly payments did not begin until January 31, 1940, three years after taxes were first collected. The first monthly recipient at age 65 was Ida May Fuller, who had paid total Federal Insurance Contributions Act (FICA) taxes of $24.75 since 1937. Although her life expectancy was just 78 years upon her retirement in 1940, Ms. Fuller lived to be 100 and eventually collected payments of $22,888.

Thus, Social Security’s first monthly recipient may have been a harbinger of the potential funding challenges now besetting both Social Security and Medicare, the latter being its healthcare counterpart. Additional benefits that have been added to these two programs, such as Social Security Disability Insurance, Supplemental Security Income and Supplemental Medicare Insurance, have also contributed to these funding challenges.

In this report, The Mather Group LLC (TMG) reviews both the current and projected financial profiles of these programs, as well as potential benefit and funding strategies intended to avoid future program reductions. Given the increasing interest in linking Social Security and Medicare costs to the looming debt ceiling negotiations, TMG believes an in-depth review of these programs is both timely and material.

Program Fiscal Profiles

The funding sources for these programs vary significantly. The table below outlines funding sources for Social Security, formally known as the Old Age, Survivors, and Disability Income program (OASDI). In 2022, 66 million individuals received annual Social Security benefits totaling $1.1 trillion.

Medicare funding comes from a combination of payroll taxes and Congressional appropriations, as outlined below. In 2022, 65 million individuals received Medicare benefits, which totaled $982 billion.

Given several factors that are discussed below, the long-term solvency of both the Social Security and Medicare programs is questionable if changes are not made to current benefit levels and funding sources. More specifically, as shown in the graphic below, the trust fund supporting Social Security (OASI) is projected to be exhausted by 2033. The trust fund for Medicare (HI) is projected to be exhausted by 2031. However, the Disability Insurance (DI) trust fund is projected to continue beyond the 75-year projection period provided by the Social Security Administration.

It is these dour projections that have led to an increased level of concern about maintaining benefits for both existing and future recipients. Irrespective of whether these programs become part of the debt ceiling negotiations, the longer changes are delayed—which could be characterized as “kicking the can down the road”—the more challenging they may become.

Program Demographic Factors

“Social Security is a plan that actually was designed in a much different time, in a different era, and with a different set of American demographics in mind.” —Ginny Brown-Waite, former U.S. Representative

As one example of such differences unforeseen in 1935 when the Social Security Act was signed, 10,000 Baby Boomers (those born 1946-1964) reach the age of 65 each day, and the last Boomers will reach this age in 2030. Demographers labeled this wave of retirees as the “gray tsunami.”

As shown in the table below, the demographic factors that have led to the current stress in Social Security and Medicare are both significant and interlinked. More specifically, the 65+ age cohort, which participates in both programs, is increasing in its absolute numbers and its share of the U.S. population.

This growth is the result of two primary factors. First, life expectancy for both genders has continued to rise, with women adding 7.8 additional years from 1960 to 2020, and men adding 9.3 years. Second, the birth rate has continued declining from its 1960 level. With a falling birth rate and greater longevity, the 65+ cohort is projected to continue increasing its share of the total population.

For the Social Security program, a primary source of funding is payroll taxes collected from individuals active in the workforce. However, as the population has aged, the number of active workers to the number of retirees—the “worker-to-beneficiary ratio”—has declined by 46% since 1960 to a level of 2.8 in 2022. It is projected to decline further during the next few decades.

Actuarial assumptions made by the Trustees of the OASDI Trust Fund caution that a worker-to-beneficiary ratio should be in the range of 2.8-3.3 to maintain program benefits at current levels. It is important to note that these projections do not include pre-65 workers who have taken early retirement due to COVID, and who could lower this ratio further.

Program Demographic Factors

Social Security

There are three primary levers offered to maintain solvency for Social Security: (1) change its eligibility criteria, (2) alter its funding sources and levels, and/or (3) replace the existing wage indexing formula used by Social Security. Below is a summary of some of these potential changes.

  • The Congressional Budget Office (CBO) has projected that gradually raising the full retirement age to 70 from its current level of 67 for those born 1960 and later would add an additional $72 billion in savings over the next 10 years. While 62 could remain the earliest age for receiving benefits, monthly payments for individuals taking Social Security earlier would be reduced significantly.
  • Today, higher lifetime earnings result in higher Social Security benefit levels in retirement. Instead, one suggestion is to “means test” the top 25%-50% of all wage earners, the results of which could be used to reduce their monthly benefits by 15%-28%. This reduction would allow lower earners to continue receiving full benefits in retirement.
  • To increase revenue, the current 12.4% Social Security payroll tax could be raised to a level of 14%-16%. Employers and employees would each pay one-half of this increased taxation level. One caution is that increased employer taxes could lead to further investments in automation that replaces lower-skilled workers.
  • Another revenue source could be to eliminate or increase the existing payroll cap, which is $160,200 in 2023. One suggestion is to raise it immediately to $250,000 and then continue to adjust it upward annually. Another is to eliminate the cap entirely but to provide no additional benefits for wage income taxed above this $250,000 threshold.
  • Another recommendation is that, rather than taxing only wage income, the Social Security tax could be applied to realized capital gains for individuals with an annual income of $1 million or higher.
  • In calculating monthly benefits, Social Security uses 35 years of an individual’s reported taxable income. These amounts are adjusted for annual wage growth, using its National Average Wage Index. As shown in the graphic below, this index has consistently been higher than the annual Consumer Price Index (CPI). If the CPI were used instead, the CBO projects that the 10-year savings would be $109 billion. However, an individual retiring in 2040 would then experience a projected lifetime benefit reduction of 24%.


The primary solvency concern for Medicare is its Part A program, which was intended to be funded entirely by payroll taxes. In contrast, Parts B, C, and D continue to receive an increasing level of Congressional appropriations. Thus, these latter three programs are considered to be adequately funded because their spending level is linked to expected appropriations each year. However, this assumption may become increasingly doubtful.

Below is a summary of some of the potential changes offered to maintain solvency for Medicare Part A.

  • As with Social Security, a primary suggestion is to raise its eligibility age from the current level of 65 to 67 or even 70. At a minimum, the age for Medicare eligibility could change to match that of Social Security. Of course, a primary driver of this policy change is to reflect the increasing longevity—and healthcare expenses—of Medicare recipients.
  • Redirect the proceeds from the Net Investment Income Tax to the Medicare program, instead of sending these funds directly into the general revenue fund as occurs today. This 3.8% tax affects high-income taxpayers,i and it is applied to investment income such as dividends. The CBO projects that, if redirected, this tax would add $350 billion in the next 10 years to the Medicare Trust Fund.
  • Part of the Plan A premiums are used to fund Medicare Part C, the Medicare Advantage program. Thus, one goal is to reduce the cost of Part C—and thus Plan A’s payments—through a revised bidding system for insurers offering Advantage that would match the method used for funding the Affordable Care Act (“Obamacare”). Estimated savings would be $6 billion per year.
  • Finally, there is a discussion of shifting the current Medicare program and its funding sources to a defined contribution plan instead, emulating the existing federal employee health benefits program. In this proposed change, the federal government would contribute a set amount of the insurance premiums for each eligible individual, who would then have a choice between joining traditional Medicare or opting for a private health insurance program instead. The government currently funds 72%-75% of annual premiums for its employees, which could be a starting point for a revised Medicare program funding strategy.

Overall, both of these earned benefit programs are facing significant funding challenges in the not too distant future. While the potential solutions may appear plentiful, it is important to note that any resolution will be subject to an increasingly arduous political process. The debt ceiling negotiations may become a first step in this process. In fairness, it may be important that, whatever solutions are chosen, the burden is shared across all generations and not simply passed on to future generations.

In the light of recent financial stress, TMG continues to employ its risk management tools. As importantly, clients who continue to adhere to their financial plan will maintain the strongest pathway through this uncertain period. Your trusted advisor at TMG is ready to respond to any questions or concerns which you might have, and to help assure that your financial plan remains both timely and actionable. Please reach out to your advisor for guidance at any time.


i The income thresholds are $200,000 for single or head of household taxpayers, $250,000 for those married filing jointly, $125,000 for those married filing separately, and $250,000 for qualified widows/widowers with a child.

Sources: 2022/2023 OASDI Trustees Reports; American Association of Retired Persons; Bureau of Labor Statistics; Census Bureau; Center on Budget and Policy Priorities; Congressional Budget Office; Congressional Joint Committee on Taxation; Federal Reserve Bank of St. Louis; Peter G. Peterson Foundation; Social Security Administration; Wall Street Journal

The Mather Group, LLC (TMG) is registered under the Investment Advisers Act of 1940 as a Registered Investment Adviser with the Securities and Exchange Commission (SEC). Registration as an investment adviser does not imply a certain level of skill or training. For a detailed discussion of TMG and its investment advisory services and fees, see the firm’s Form ADV on file with the SEC at, or on the firm’s website at The opinions expressed, and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The opinions and advice expressed in this communication are based on TMG’s research and professional experience and are expressed as of the publishing date of this communication. All return figures and charts shown are for illustrative purposes only. TMG makes no warranty or representation, express or implied, nor does TMG accept any liability, with respect to the information and data set forth herein. TMG specifically disclaims any duty to update any of the information and data contained in this communication. The information and data in this communication does not constitute legal, tax, accounting, investment, or other professional advice. Investing involves some level of risk. Past performance does not guarantee future results.

The Mather Group



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