On August 31, the Trustees of the Medicare and Social Security trust funds released their annual report on the fiscal health of America’s two largest retiree entitlement programs. The news wasn’t good; according to the report, the expected date that Social Security’s trust fund would be depleted was moved earlier by one year to 2033. Medicare’s solvency status appeared even more dire with projected shortfalls in Part A funding beginning in 2026, just five years from now. (The worsening condition of each program was partly blamed on the Coronavirus pandemic which increased health care expenditures and influenced many workers to retire earlier than projected.)
The report concluded that without significant changes (higher payroll taxes, an increase in full retirement age, higher Medicare premiums, etc.), these two programs as currently structured will not be able to pay 100% of promised benefits at some point in the relatively near future. Some media outlets pounced on the report and declared “Social Security to go bankrupt in just 12 years!” How did we end up here?
Social Security was established in 1935 and Medicare in 1965. At the time, government actuaries made their best guesses as to future life expectancies, retirement ages, health care costs, and labor force growth. With these estimates in hand, payroll tax deductions were set at a level thought to cover each program for several decades, if not indefinitely. At first, each program took in far more than it spent, and the excess was placed in a kind of “trust fund” for future beneficiaries. However, as the decades went by, it became clear that workers were retiring earlier (and living longer) than expected. Adjustments were made to shore up each program, including raising the age of “Full Retirement” from 65 to 67 for Social Security. But health care costs rose faster than anticipated as well. You can make an argument that early projections were overly optimistic, but in any case, it has been clear for a while that the trust funds will be depleted in a few years if Congress does nothing.
Yet despite the bleak projections, the latest status reports do not fall in the category of ‘things I worry about’. As someone who plans to retire after 2033, significant cuts in these two programs would certainly impact my retirement lifestyle. However, I still intend to fully benefit from both Medicare and Social Security after age 65. Am I just walking around with rose-tinted glasses?
I don’t think so. The reasons behind my confidence are both political and financial. First, ensuring that health and retirement income benefits continue to be fully paid is not a controversial issue. There is near universal agreement in Congress that something needs to be done to address the issue. And they have a very strong incentive to do so. Politicians are fully aware that America’s retirees make up a very sizable voting bloc and that ‘cutting retirement benefits’ is just not a viable strategy for election success.
Secondly, there are several potential solutions to the funding shortfalls. Payroll taxes could be increased, full retirement age could be adjusted again, the cap on income subject to payroll tax could be eliminated, Medicare premiums could rise, or Cost of Living Adjustments could be reduced. Some combination of these changes could extend the life of the trust funds by many years or decades.
But more fundamentally, Medicare and Social Security do not face an actual solvency crisis as suggested in the dramatic headlines. The fact that Congress has chosen, until now, to fund them with so-called “trust funds” represents a budget accounting convention, not an actual lack of resources. For proof, note that Medicare’s “solvency crisis” applies only to Part A (hospitalization coverage). Though not often highlighted in the news reports, Part B (doctor’s visits and medical services) and Part D (prescription drugs) face no such crisis and are expected to pay 100% of benefits for the foreseeable future. What accounts for the major difference in outlooks?
The answer is surprisingly simple – Congress has granted Medicare the legal authority to make full benefit payments for Part B and Part D, regardless of the dollar amount in the trust fund. In other words, Medicare can always pay benefits on Part B and Part D because Congress has made it a priority and agreed to cover those payments as part of the general budgeting process.
Now you might be thinking “Wait a minute – couldn’t Congress fund Social Security and Medicare Part A in the same way, instantly eliminating the perceived risk of insolvency with the stroke of a pen?” The answer is: Yes, they could, absolutely. That they have not done so up to now has more to do with politics and mental accounting than anything else.
I don’t mean to trivialize or ignore the fact that Medicare and Social Security account for an ever-larger share of total government expenditures. Government resources are not unlimited; entitlement costs are growing faster than the overall economy and the trend appears to be unsustainable. Everyone agrees that something needs to be done. But at the same time, it is important to recognize the difference between a true constraint and a manufactured one. National priorities (e.g. defense spending) typically do not rely on “trust funds”, but rather are funded through general tax revenue as part of the annual budgeting process. (This is why the Pentagon is not facing a solvency crisis!) If Congress decided to fund Medicare Part A and Social Security in the same way, America’s retirees would have one less thing to worry about.
For more than half a century, Medicare and Social Security have provided America’s retirees with a secure monthly income and an important safety net against poverty in old age. The declining balances of their underlying trust funds is a well-known issue, and Congress has any number of ways to address the problem. While we can’t predict what the ultimate solution will be, we do know that Congress has the power to maintain 100% of promised benefits, even if the trust funds are depleted someday.
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