This week on Facing the Future, we looked at challenges ahead for Social Security and Medicare. According to the latest reports from the Social Security and Medicare trustees, we are creeping towards insolvency for both programs by the next decade. Concord Coalition Communications Director Av Harris once again hosted the show, joining Policy Director Tori Gorman, and Chief Economist Steve Robinson, and me. We looked into some details of the Trustees Reports, analyzing what they mean for Social Security and Medicare, the implications for both taxpayers and beneficiaries of the programs, how it impacts our overall national debt and annual deficits, and what options Congress has for stabilizing the trust funds.
According to the Trustees’ reports, the Medicare Hospital Insurance Trust Fund (Part A) will become insolvent within 6 years – by 2028, the Social Security retirement trust fund depletion date is 2034, and while the Social Security disability trust fund is technically solvent for the duration of the 75-year projection period, expanded eligibility to cover cases of “long COVID’ could dramatically change that. On a combined basis, the Social Security Trust Funds will be depleted by 2035.
Dates once predicted far into the future are now just on the edge of our horizon. What does that mean? I broke it down this way:
“People should understand that trust fund insolvency doesn’t mean that the programs will go away or that they can’t pay benefits. What it means is that the programs only have authority to cover as much as they can through the payroll taxes that come into the system. When the trust funds are gone and run out, it means that they don’t have any special borrowing authority from the Treasury. They’ve run out of that from their trust funds, so by law – they’re limited by the amount of income that comes in. No one is quite sure what would happen in the case of insolvency, and we don’t want to find out. But many believe that there would be a substantial, across-the-board benefit cut.”
Much of the current crisis in Social Security and Medicare is driven by demographics as the Baby Boom generation becomes eligible for benefits. The number of senior citizens is expected to grow substantially over the next decade, but the working age population, which pays the taxes to fund the benefits of today’s retirees, is too small to cover those costs. Concord Policy Director Tori Gorman says every day that Congress fails to act only makes the task that much more difficult, and the options are already ugly.
“If Congress acted today to fix Social Security retirement and disability, and they wanted to do it just with tax increases, they’d have to raise the payroll tax from 12.4% to 15.6%, which is basically a 26% increase, overnight,” said Gorman. “And that’s on every worker. Everybody pays into Social Security. Not everybody pays income tax, but everybody who has a job and receives wage and salary income pays Social Security on that first dollar earned. If we said ‘ok we’re not going to do this with taxes, we’re going to do this on the spending side’, they’d have to reduce benefits by 20% for all beneficiaries, including the people who are retired today. Not just the people who are retired tomorrow or 10 years from now, but the people who are retired today.”
Gorman says the picture gets much worse if Congress waits until 2034, when the Social Security retirement trust fund is projected to become insolvent, to pass legislation to fix Social Security — similar to what a Democratic Congress and Republican President Ronald Reagan did in 1983 just a few months before insolvency.
But Concord chief economist Steve Robinson says Congress may not actually have until 2034 to act on Social Security, because the Trustees reports have significantly undercounted the impact of inflation. The spike in prices in the last year has resulted in much higher cost of living adjustments (COLA) to current recipients, and that speeds up the time table towards insolvency.
“They are saying the COLA coming up for next year is only going to be 3.8%. I think by anyone’s estimation they have significantly underestimated what the inflation cost of living adjustment is going to be for next year,” said Robinson. “The chief actuary gave an interview recently and he indicated that the COLA is likely to be 8%. We’re spending about a trillion dollars a year on Social Security benefits. If you multiply the $1.2 trillion in benefits by 4%, you’re at about $50 billion, which is added to the cost of the program. So if you assume it actually goes to 8%, that’s twice as much. And that $50 billion gets compounded because every subsequent COLA gets paid on top of that $50 billion. That $50 billion compounded over the next 10 years is a significant number. Potentially, that could shift the insolvency date, instead of it being 2034-35, it might be 2033.”
The large cash deficits run every year by Social Security and Medicare are major contributors to our yearly federal budget deficits, and are a large part of the pileup of our national debt. Even though both programs were designed to pay for themselves by having a dedicated revenue source, large transfers of general revenue have been required to pay interest to the trust funds which is used to pay benefits to recipients. Part of my concern is that instead of taking the bold steps necessary to fix Social Security and Medicare, Congress will employ gimmicks to temporarily push off insolvency, while our national debt crisis grows larger and more serious every day.
Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join my guests and me as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.