Pressing the Snooze Button on Entitlement Reform

Author: Bob Bixby
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“Let’s stand up for seniors,” President Biden said in his State of the Union address. “Stand up and show them we will not cut Social Security. We will not cut Medicare.” On cue, the assembled members of Congress did just that. It was a telling moment that may have dire consequences for any realistic attempt to put the federal budget on a sustainable path. 

Missing from this rare moment of bipartisan unanimity was any acknowledgement that Social Security Trust Fund and the Medicare Hospital Insurance Fund (HI) are headed for insolvency within a dozen years and that their growing costs are the main drivers of projected record deficits.

It’s possible that the president only meant to suggest that cutting Social Security and Medicare were off the table as a condition for raising the debt limit. That would be a reasonable position. The debt limit needs to be raised so that the government can pay bills that have already come due. There is no need to condition this on Social Security and Medicare “cuts.” 

Biden’s words, however, suggested a broader meaning. Americans hearing the president declare that Social Security and Medicare are “off the books” (he probably meant “off the table”) – and hearing the resounding bipartisan congressional applause in response – could be excused for thinking that the two programs were henceforth untouchable. That would be a real problem for seniors and for the federal budget.

Social Security and Medicare are enormously important programs for millions of Americans who rely on them for current or future retirement income, disability benefits, and healthcare needs. That, however, makes it all the more important for the president and Congress to be honest and upfront with their constituents about the challenges both programs face. 

The first challenge is to avoid the automatic cuts that would result from trust fund insolvency. As detailed in successive annual reports of the Social Security and Medicare trustees, neither program can continue to pay promised benefits in full or on time once their trust funds are exhausted. Ignoring the warnings in these reports will leave the public unprepared for changes that must inevitably be made to make these vital programs sustainable for all generations. 

Those changes must come soon. According to the trustees, Social Security faces insolvency in 2035 and Medicare (HI) in 2028. They will still be able to pay some level of benefits even after their trust funds are exhausted because the programs will continue to collect payroll taxes. But payments will need to be reduced or delayed to match incoming cash — equivalent to a 22 percent cut for Social Security benefits and 9 percent of scheduled reimbursements to Medicare providers. 

This outcome would pose huge hardships on current beneficiaries, but instead of sounding alarm bells the president and Congress hit the snooze button. 

To illustrate the magnitude of the Social Security challenge, the Trustees’ 2022 report estimated that one of three things must happen to keep the retirement program solvent over the next 75 years: (1) payroll taxes would have to increase immediately and permanently by 26 percent — from 12.4 percent to 15.64 percent; (2) scheduled benefits would have to be reduced, for all current and future beneficiaries by an immediate and permanent reduction of 20.3 percent; or (3) a combination of the two. Delaying action until 2035 would increase the necessary payroll tax to 16.47 percent, require a 24.9 percent benefit cut, or some combination of the two.

Alternatively, Congress could choose to simply fund any shortfalls with general tax revenues. But as The Concord Coalition’s chief economist Steve Robinson, and former Social Security Administration policy advisor, pointed out in a recent issue brief, “the use of general revenue to maintain trust fund solvency would break the historical link between benefits and taxable wages and undermine the public perception that Social Security is an earned benefit, rather than welfare.” 

If policymakers really want to “stand up for seniors,” they should have an adult conversation about potential reform options before the trust funds become insolvent. 

Aside from the solvency challenge, there is the overall budgetary challenge. The combined costs of Social Security and Medicare already comprise roughly 35 percent of all non-interest (primary) federal spending. Over the next 30 years, the Congressional Budget Office (CBO) projects that under current law they will grow from 7.8 percent of gross domestic product (GDP) to 12.3 percent, or more than half of all non-interest spending by 2052. Such cost pressure would inevitably squeeze out other spending, including investments designed to help children and young adults. 

Some people believe that there isn’t really a problem because Social Security and Medicare “pay for themselves,” but that is not true. The Trustees’ reports warn that Social Security and Medicare HI will experience growing cash deficits in the future as they pay out more than they receive from their dedicated revenue sources. General revenues already support Medicare’s Supplemental Medical Insurance (SMI) program, which provides various medical services and prescription drug benefits (Medicare Parts B and D) By design, the premiums that older Americans pay for SMI benefits only cover 25 percent of their costs.

According to the Trustees, the general revenue transfers to Social Security and Medicare totaled $554 billion in 2021 or 2.4 percent of GDP. This consisted of $126 billion for Social Security and $428 billion for Medicare. If full benefits were maintained in both programs, by 2064 these transfers would double to 4.8 percent of GDP. The more Social Security and Medicare siphon from the general fund, the less money there is for other important priorities such as national defense, veterans’ care, health care services for the poor, and programs that help make a college education affordable, just to name a few.  

Debt held by the public is nearing an all-time high as a share of our economy. The CBO projects that it will nearly double over the next 30 years. It would be very difficult, if not impossible, to put the federal budget on a more sustainable path if Social Security and Medicare are “off the table” for even modest phased-in reforms.

Standing up for seniors (literally) may be good political theater for a State of the Union address, but no one should overlook the societal and budgetary costs of continued inaction. Pressing the snooze button doesn’t make time stand still. It just makes you late.

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