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Social Security and Medicare to be Insolvent by 2034 and 2026

       6/8/2018

Bernie Sanders

                                                                                                                                                                                                                                                 

In their annual report issued Tuesday, the Social Security and Medicare Trustees projected that the entitlement programs would reach insolvency in 2034 and 2026 respectively. While this news appears devastating on the surface, it is important to remember that the Trustees yearly adjust the date of insolvency based on projections of future spending and revenues and that the dates for Social Security’s and Medicare’s insolvencies have advanced by only one and three years from the 2017 report. Additionally, insolvency does not mean that all benefit payments by these programs will cease, but rather that the programs will become unable to fulfill their entire projected expenditures. The report also states that in 2018, for the first time since 1982, total costs of Social Security will exceed its total income including interest. The situation is not expected to improve in the coming years as a growing share of Baby Boomers reach retirement age.

“Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow from 13.7 percent in 2017 to roughly 16.8 percent in 2039, and will then decline slightly before slowly increasing after 2051. Expressed as a share of GDP, program costs equaled 4.9 percent of GDP in 2017, and the Trustees project these costs will increase to 6.1 percent of GDP by 2038, decline to 5.9 percent of GDP by 2052, and thereafter rise slowly, reaching 6.1 percent by 2092.”

In practical terms, this means that with the current Social Security tax of 12.4 percent, after 2034 the administration will only be able to pay out 77 percent of current benefits.

While Medicare is expected to reach insolvency in only 8 years, the situation with this program is more nuanced as it is supported by two trust funds, the Hospital Insurance (HI) fund and the Supplementary Medical Insurance fund (SMI). The SMI is expected to be adequately financed into the indefinite future, however, after 2026, dedicated revenues will only be sufficient to pay 91 percent of HI expenditures. The Trustees report further states that, “the share of HI cost that can be financed with HI dedicated revenues will decline slowly to 78 percent in 2039, and will then rise gradually to 85 percent in 2092.” While the trustees factored into the model an expected reduction in per capita healthcare costs, the aging population ensures that overall Medicare costs will continue to increase from 3.7 percent of GDP in 2017, to 6.2 percent by 2092.

Treasury Secretary Steve Mnuchin expressed his confidence that continued economic growth will stave off the impending entitlement crisis saying, "tax cuts, regulatory reform, and improved trade agreements will generate the long-term growth needed to help secure these programs and lead them to a more stable path." However, this view relies on a best-case scenario of sustained economic growth and seems to ignore the reality of the market’s cyclical nature.

Democratic lawmakers wish to raise taxes and in many cases, increase the benefits provided by these programs, some even advocating a universal basic income. Conservatives, on the overhand, advocate various entitlement reforms, including means testing for benefits and raising the retirement age. As distasteful as these reforms seem, we must seriously consider all the options. Our legislators cannot continue to kick this can down the road, no matter how much of a political landmine it may be. A solution to the problem of Social Security and Medicare’s impending insolvency will likely require compromise and sacrifices, from both sides. The sooner those sacrifices are made, the less they will hurt.

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