Social Security’s finances worsened over the past year while Medicare’s improved slightly, according to government actuaries. But the annual reports from the programs’ trustees, released Friday, show that lawmakers could have some tough decisions to make within the next decade.
The Social Security trustees report said that retirement benefits are expected to be paid in full until 2033, when they’d face a 23 percent cut if no policy changes are made. That’s one year earlier than in last year’s report. If combined with separate disability insurance funds, the combined exhaustion date of the retirement and disability programs moves up a year from last year’s projection, to 2034.
Medicare’s Hospital Insurance trust fund, on the other hand, can pay full benefits until 2031, when benefits would be cut by 11 percent; that’s three years later than in the 2022 trustees report.
The trustees say in their new report that Social Security’s finances have worsened due to a deteriorating economic outlook based on updated inflation and gross domestic product data, while Medicare’s have improved due to lower projected health care spending.
Either way, benefits for the two chief U.S. retiree benefit programs have become a political football in debt ceiling talks as the two parties trade barbs over which is more devoted to seniors.
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Even as experts agree that benefits will ultimately be cut if no action is taken — the nonpartisan Congressional Budget Office, using a slightly different methodology, says Social Security benefits can be paid in full through 2032, and Medicare through 2033 — there’s little to no agreement in Washington on how to fix the problem.
AARP, which advocates for individuals aged 50 and over, said Friday’s reports reinforce the need for bipartisan solutions to Social Security and Medicare’s financial shortfalls.
“Congress must take its responsibility to protect Social Security and Medicare seriously, by developing a comprehensive plan and doing so in a way that is accountable and fully transparent to the American public,” AARP CEO Jo Ann Jenkins said in a statement. “AARP will be vigilant in assessing how any proposals will impact older Americans — and fighting to protect the earned benefits of our members and all older adults.”
Social Security
Social Security’s finances have been waning as retirements outpace new workers paying into the system when they earn wages. The program’s trustees warn in the latest report that if lawmakers wait until the last minute to shore up Social Security’s funding then significantly larger changes would be needed in 2034 because of the missed chance to apply them to more years and more generations.
“The Trustees continue to recommend that Congress address the projected trust fund shortfalls in a timely fashion to phase in necessary changes gradually,” acting Social Security Commissioner Kilolo Kijakazi said in a statement. “Social Security will continue to play a critical role in the lives of 67 million beneficiaries and 180 million workers and their families during 2023. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”
The report says that to keep Social Security’s retirement and disability trust funds afloat through the next 75 years, changes in 2034 would require a 4.15 percent point increase in the payroll tax rate totaling over 16.5 percent split between employers and workers, or a more than 25 percent benefit cut for all recipients. Slightly less drastic changes could be made sooner, like raising the payroll tax to over 15.8 percent, according to the report.
Either action, though, is unlikely to be the solution that Congress lands on. Currently, Social Security taxes are only charged on the first $160,200 of an employee’s income; Democrats have proposed expanding it to higher earnings, though tax increases don’t usually find support from Republicans.
A bipartisan group of senators led by Bill Cassidy, R-La., and Angus King, I-Maine, have been discussing options to shore up Social Security’s finances, though Cassidy has said he wants President Joe Biden’s backing before any plan is final. Any legislation to boost Social Security’s finances will likely be politically fraught if options cut back benefits in any form or raise taxes.
Medicare
A higher number of covered workers paying taxes and higher average wages contributed to the short-term improvement of the trust fund’s health, the trustees said.
Still, the trustees warned the Medicare trust fund faces long-term challenges that must be addressed as soon as possible. After 2031, revenues will be inadequate to fully cover costs, and beneficiary access to health care services could “rapidly be curtailed,” the trustees said.
Total Medicare expenditures were $905 billion in 2022, making up 3.7 percent of U.S. gross domestic product. The trustees estimated expenditures will make up 6.1 percent of GDP by 2097, putting a “strain on the nation’s workers, the economy, Medicare beneficiaries and the federal budget.”
The growth comes from the aging of the baby boom population and rising per beneficiary spending, the trustees said.
In 2022, the health insurance program’s income exceeded expenditures by $54 billion.
As with Social Security, the Medicare hospital insurance fund is financed by payroll taxes that come out of workers’ paychecks, with an equal amount paid by their employers. Each pays 1.45 percent on all wages, unlike with Social Security taxes that are capped at $160,200 in 2023. Workers making $200,000 and above are charged an extra 0.9 percent Medicare tax.
To remain solvent over a 75 year projection period, the standard 2.9 percent payroll tax could be immediately increased to 3.52 percent or expenditures could be reduced immediately by 13 percent, the trustees wrote.
President Joe Biden’s fiscal 2024 budget request proposes to raise the maximum Medicare payroll tax to 5 percent for households earning more than $400,000 and apply the tax to all forms of income, including business owners’ profits.
Combined with additional Medicare prescription drug savings from a separate budget proposal, the administration believes it can prolong the trust fund’s solvency for decades. But there’s little chance of getting those proposals, which couldn’t get through a Democratic Congress over the past two years, enacted under a divided Congress.
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Meanwhile, the trustees projected the Supplemental Medical Insurance trust fund, which primarily pays for outpatient care, will be adequately financed because of income from premiums and government contributions.
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