Another Looming Disaster

O n a week when Americans were distracted by the calamity in Afghanistan, landfall of the powerful Hurricane Ida, and the ongoing Delta surge, one could be forgiven for missing news on another looming disaster. But on Tuesday, we got word that the crisis facing our unsustainable entitlement programs will be more severe, and arrive sooner, than many people think.

Each year, the trustees for Social Security and Medicare are required to give updates on the state of finances for the two programs — easily the two largest in the federal budget, with combined expenditures of $2 trillion. By law, the reports are due on April 1. Although under recent presidents that deadline has not been met, this year’s five-month delay pushed the report later than any issued during the Obama or Trump administrations. But the delay cannot obscure the reality, and the resulting reports are not pretty.

Let’s start with Social Security. Washington has long perpetuated the accounting fiction that there is some “trust fund” where money accrues during people’s working years, waiting to be accessed when they retire. In reality, Social Security operates more like a pyramid scheme, in which current workers are subsidizing the benefits of current retirees. There is no actual money sitting in any trust fund. During the years when workers paid more in taxes than Social Security paid out in benefits, the surplus money went to finance other government functions, so this created a set of IOUs from one account of the federal government to the other. In reality, everything ultimately comes from the same bank account.

That said, the trust fund does have practical implications. As long as these IOUs still exist, Social Security can tap into other federal resources to cover any shortfalls. But once the trust fund runs out, it can only pay for benefits covered by that year’s dedicated payroll-tax collections. Since 2010, the program has paid out more in benefits than it has collected in payroll taxes, and so the balance of the trust fund has steadily dwindled. The trustees expect the program to continue running deficits going forward, evaporating what’s left of the trust fund by 2033, which is a year earlier than in last year’s report. At that point, the program will be able to pay out only 76 percent of promised benefits. Put another way, absent action, retirees will automatically lose about one-fourth of their benefits at that point.

Keep in mind, in 2005, when President Bush proposed reforming Social Security and was attacked as being an alarmist, the expected trust-fund expiration date was 2042. What was then 37 years away is now just twelve years away. That means it could be directly relevant to those in their mid-50s who expect to retire in the next decade.

In present-dollar terms, the program is in a $19.5 trillion hole over the trustees’ 75-year projection period. Because we’ve punted on the issue for so long, at this point, making the combined retirement and disability components of Social Security solvent over the long run, the trustees calculate, would require increasing the current 12.4 percent payroll tax to nearly 15.8 percent. Absent tax hikes, benefits would have to be immediately slashed by 21 percent for all current and future retirees, or 25 percent if the changes were to apply only to those who retire starting this year.

If this seems bad, the situation facing Medicare is even more urgent. The core hospital program is projected to run a deficit “in all future years,” and its trust fund is expected to run out in 2026. That’s just five years from now, in the next presidential term. While Social Security’s finances are strained by the retirement of Baby Boomers and longer life expectancy, Medicare — in addition to those challenges — is affected by the staggering growth in health-care costs. For the program to be in balance in the long run, the trustees estimate that it would require increasing the Medicare portion of the payroll tax this year from 2.9 percent to 3.67 percent, immediately slashing Medicare spending by 16 percent, or some combination of the two.

Taking things together, right now, the combined cost of Social Security and Medicare taxes adds up to 15.3 percent of a worker’s earnings (although this is technically split between the employer and employee, economists agree that the employer share is effectively passed on to the employee). Bringing both programs into balance would require raising that to about 20 percent. In dollar terms, that would mean that a family with income of $100,000 would have to pay an additional $4,660 in taxes annually. And with each passing year, that number goes up.

By law, the Medicare trustees were required to issue a formal Medicare-funding warning. This is supposed to require President Biden to respond within 15 days of submitting his next budget and require Congress to consider any legislation to address the problem on an expedited basis. It has unfortunately been the default for the president and lawmakers of both parties to ignore this warning. But Democrats propose to go further than merely ignoring the problem.

Right now, instead of grappling with fiscal reality, Democrats are rushing to enact an additional $4.1 trillion in new spending (a portion of it, it should be noted, with Republicans’ blessing). Among the extravagant ideas being proposed in the budget is to add dental, vision, and hearing benefits to the crumbling Medicare system. While technically, such benefits would apply to a different portion of Medicare than the hospital trust fund, it’s irresponsible to pretend that money doesn’t all ultimately come from the same bank account.

If Democrats have to rely on a combination of tax increases, savings, and more debt issuance to pay for $4.1 trillion in new obligations, those fiscal resources will no longer be available to address the challenges facing the finances of Medicare and Social Security. If the so-called Democratic moderates are sincere in their concerns about the nation’s unsustainable debt, the new reports from the Social Security and Medicare trustees should convince them to change course, ditch their party’s reckless liberal agenda, and act responsibly to address another crisis that is staring us in the face.