June 13, 2019
Every year the Social Security and Medicare Trust Funds are evaluated for their soundness. The 2019 Trustees report showed that both programs continue to face long-term financing shortfalls. The dates for which these trust funds are depleted vary slightly from one report to the next, but in all cases the end is in sight. The good news is that policy makers have a broad array of options to address the projected shortfall. If small adjustments are made early on, the pain will be relatively small. The bad news is that policy makers have little appetite to make the required adjustments.
We typically think of “the” Social Security Trust Fund, but the reality is that there are actually two separate trust funds. The Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits. The Disability Insurance (DI) Trusts Fund pays disability benefits. The OASI Trust Fund has $2.8 trillion in reserves. It dwarfs the size of the DI Trust Fund which has just $97 billion. For purposes of this report we will focus on the combination of the two.
The latest report indicates that for the two combined Social Security trust funds expenditures will exceed receipts for the first time in 2020. At that point reserves will steadily dwindle until they are fully depleted in 2035. Once depleted Social Security recipients will continue to receive monthly payments, but those payments will be reduced. Steady income from payroll taxes will be sufficient to pay 80% of the scheduled benefits initially, but then gradually decline to 75% by 2093 (the final year of the 75-year projection period.
Similarly, we talk about a single Medicare Trust Fund but, like Social Security, there are two separate health insurance trust funds. There is the Hospital Insurance (HI) Trust Fund (Medicare Part A). It has reserves of $200 billion. Then there is the Supplemental Insurance Trust Fund (SMI) which helps pay for physician, outpatient hospital, and home health services for the aged and disabled (Part B), as well as drug insurance coverage (Part D). This trust fund has $104 billion of reserves.
For the HI Trust Fund expenditures began to exceed income in 2018. The depletion date is 2026 – just seven years from now. After depletion the allocated tax income will initially be sufficient to pay 89% of the estimated cost, decline to 78% by 2043, and climb again to 83% by 2093.
We tend to talk about the Social Security and Medicare Trust funds simultaneously and quickly note that they will be depleted in the not-too-far-distant future. But they need to be discussed separately because the big gorilla is Social Security where the two combined trust funds have $2.9 trillion of reserves compared to the two Medicare trust funds which have just $300 billion. The former is 10 times the size of the latter.
Given widespread recognition that these trust funds will soon be running out of money and the unwillingness of politicians to address the shortfalls, one is tempted to conclude that the solutions are intractable. That is simply not the case. The solutions are easy to find. Any economist can figure out how to make these trusts funds sustainable in a heartbeat. But the willingness to implement those changes is non-existent.
What might help eliminate the projected Social Security shortfall? Here are a couple of obvious suggestions:
- Boost the retirement age gradually from 67 years currently to 69 years. Most studies recommend an adjustment of one to three months annually.
- Raise the maximum earnings subject to the Social Security payroll tax from $132,900 currently to $200,000. Currently, a person that makes $1 million per year pays exactly the same amount of Social Security tax as someone making $132,900. This seems to make no sense.
- Reduce benefits for high income wage earners. The modest amount of Social Security benefits has little significance for individuals making income in excess of $1 million, or even those with income in excess $500,000. Gradually reduce benefits for these high income individuals.
The solutions for Medicare are equally simple if one is willing to make people responsible for at least some portion of their health care expenditures
- For Medigap policies do not cover the first $500 of expenditures.
- For expenditures between $500-$5,000 cover 50% of the expenditure.
- Raise the eligibility age from 65 currently to 68.
- Malpractice suits must subtract from the award any workman’s comp and insurance payments received by that individual.
Interestingly, each of the suggestions above were specifically highlighted in the Erskine-Bowles Commission report back in 2010. President Obama appointed the commission and charged it with returning fiscal policy to a sustainable path. Everything was on the table. The commission was expected to determine the proper individual and corporate tax rates and make specific recommendations to get the Social Security and Medicare programs back onto a sustainable track. Think about it – 18 commission members — 9 Republicans, 9 Democrats. Nobody expected them to find a solution, but they did. Unfortunately, Obama rejected its recommendations because, in his view, they cut too deeply into entitlements. The brass ring on the merry-go-around was in his grasp, but he missed it. Nine years ago our two political parties actually talked to each other and were able to reach agreement on a contentious issue. Such an outcome today seems inconceivable.
Nevertheless, the problems remain and D-day (depletion day) is approaching.