WASHINGTON (TND) — Congress has some extra time to figure out a way to shore up the finances of Medicare and Social Security thanks to an improved economy pushing back the date both entitlement programs are expected to reach insolvency and bring on automatic cuts to benefits.
The trustees for Social Security and Medicare issued their annual reports on the state of the programs’ finances, both of which found looming insolvency has been pushed back some thanks to a strong economy and spending that came in below expectations.
Medicare’s hospital insurance trust fund has an additional five years before reaching insolvency in 2036 after higher payroll taxes and expenses that came in under projections. Once its reserves are depleted, automatic benefit cuts would come and Medicare would only be able to cover 89% of costs for hospital visits, hospice care and nursing homes.
Medicare covered around 66 million people last year, a majority of which are 65 and older.
Social Security, which provide payments to people 67 and older or those with a disability, is on pace to run out of reserves in 2035, a one-year improvement from last year’s projections. Once it reaches the “go broke” point, it would only be able to pay out 83% of benefits. Some 71 million Americans receive Social Security benefits.
Both programs have a slightly brighter outlook based on the trustees’ projections but are still in need of a legislative solution. Lawmakers have been aware of these problems for decades but have not taken action despite dire warnings laid out in the annual trustees’ reports.
“It’s kind of like you have a meteor that’s falling to earth and each year you make a assessment of how it’s crashing into earth. It’s still crashing into earth no matter what,” said Charles Blahous, a senior research strategist at George Mason University’s Mercatus Center and a former trustee for Social Security and Medicare.
The main driver behind the budget crisis facing Medicare and Social Security is an aging population that is causing more people to be receiving benefits than paying into the programs, along with an increasing cost of health care in the U.S.
Medicare and Social Security are deeply popular with Americans of all political leanings, and many of the routes to getting the programs back toward solvency are not. To prevent them from reaching insolvency, lawmakers will need to figure out a plan that is likely to include some form of tax increases, benefit reductions and delays to the dates they are paid out by raising the retirement age.
The longer Congress waits, the more likely it will be that they will need to dip into general funds to keep full benefit payouts, which would be a significant departure from how Social Security and Medicare have operated since they were launched.
“This is a unique animal among federal programs. This is a separate, self-financing program. You pay payroll taxes into it, you have these separate trust funds. The whole idea is that this is an earned benefit, you paid for it, you earned it, all of that. Well, if we have to bail it out with a massive infusion of funds from general revenues, all of that’s out the window,” Blahous said.
The last reforms to Social Security and Medicare came over 40 years ago and despite repeated warnings about a looming fiscal cliff for both of them without further intervention, Congress has been unable to reshape its financial outlook since. Experts have warned that the longer Congress waits to reform the programs, the harsher the changes will have to be to make the programs whole.
The gloomy financial outlook for Social Security and Medicare has led many Americans, particularly younger people entering the workforce, to wonder if they will be able to receive the same benefits that older generations did.
“There’s probably going to need to be a combination of slowing the growth of benefits for higher income earners, raising the payroll tax cap and getting more revenues to the program, adjusting some of the calculations we have for the benefits and raising the retirement age for younger workers,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.
Presidential election year politics are likely to be an insurmountable obstacle for any short-term options to address Medicare and Social Security’s solvency troubles. The federal budget has also been a sharply divided political issue in the current Congress, with House Republicans in the majority pressing for significant cuts to make a dent in the national deficit that has ballooned to over $34 trillion.
“The one thing we should be able to agree on is that doing nothing is outright reckless and it deeply saddens me that we are at a point where our government is running from one of the most obvious, predictable and potentially damaging problems that there is in our federal budget,” MacGuineas said.
The politics of shoring up the programs have been one of the main hurdles that has led them toward going broke, a trend that has continued into this year’s presidential election. President Joe Biden has made repeated vows to protect both programs and accused Republicans and former President Donald Trump of trying to make cuts. Biden has proposed a tax on high-income earners to bolster funding for the programs, though there are questions about how effective his plan would be.
“I will always fight for America’s seniors and prevent Republicans from cutting Social Security and Medicare,” Biden said in a statement.
Trump has gone back and forth between being open to cuts to the programs and making pledges to protecting the benefits since first being elected in 2016. Several of his budget proposals included cuts that were never enacted, and he said in an CNBC interview earlier this year that he would be open to cuts before backtracking. His campaign has not released a plan to address the shortfall.
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