The Social Security Trustees released their latest report yesterday, which showed that the finances of the system are deteriorating. In particular, The Trustees moved up the date when Social Security will become insolvent by three years, from 2036 to 2033. In 2033, absent any reform, the Social Security benefits of all recipients will be reduced across the board by 25%.
We can avoid this unpleasant outcome by acting soon to slow the growth of Social Security benefits. As I have explained before, the initial benefits of Social Security grow faster than the consumer price index and we cannot afford that rate of growth. So to keep the program solvent, we should slow down the growth of benefits to high- and middle-earners—as well as take other measures.
However, we should not cut benefits for low earners, who have almost no savings in IRAs or 401(k)s. The tax benefits of these retirement plans flow almost exclusively to high- and middle-earners, to the tune of nearly $180 billion per year (see page 264 here). In addition, low earners have substantially lower life expectancies than higher earners – so low earners tend to receive Social Security benefits for fewer years.
The latest report on the Medicare system seemed more optimistic. According to the Trustees, the Medicare Part A trust fund will become insolvent in 2024, as they also projected last year. They further project that total Medicare spending will rise from 3.7% of GDP in 2012 to 6.7% of GDP in 2080. This is only slightly larger than the Social Security program, whose outlays are expected to comprise 6.1% of GDP in 2080 (up from roughly 5% today).
However, the long-term projections for Medicare paint too rosy of a picture, as they are based on incorrect assumptions, as the Trustees acknowledge. The Trustees’ mandate forces them to make projections based on current law, even if current law is routinely and predictably modified by Congress. For instance, Medicare payments to doctors are scheduled to be reduced every year to reflect the “Sustainable Growth Rate” (SGR) instituted in 1997—a provision that Congress patches every year in what’s known as the “Doc Fix.”
The projections also assume that the Affordable Care Act (ACA) will successfully squeeze $500 billion from Medicare by restricting the growth rate of payments to hospitals. Although this restriction is more realistic than the SGR, the Trustees suspect that the ACA’s savings could nevertheless meet a similar fate of annual patches by future Congresses. Furthermore, the constitutionality of the ACA’s individual mandate is now before the Supreme Court; if the Justices strike down that provision and declare it non-severable, these savings would be eliminated.
Based on more realistic assumptions—which ignore the SGR and predict that the ACA restriction will be patched over nine years—Medicare is projected to grow much more quickly (see page 220, here). By 2040, it is projected that Medicare would pay out more than 7% of GDP, rising to 10% of GDP by 2080. Congress must become willing to constrain the growth of Medicare in realistic ways as soon as possible, or else it will become a serious drag on the U.S. economy.