Is Fixing Social Security and Medicare as Dire as It Seems?

There must be 50 ways to improve Social Security.

This is not a direct quote from Paul Simon lyricsBut I find myself humming this tune every year when Social Security trustees issue their annual report on the health of the program.

Like clockwork, Social Security Go bankrupt or Running out of moneySimilar headlines will likely be seen about the Medicare Trustees’ Reports.

This year, consider inaccurate reporting in the context of a significant milestone: the 50th anniversary of the Employment Retirement Income Security Act (ERISA). This landmark federal law was enacted in 1974. ERISA established badly needed fiduciary standards and regulations for private pension plans in the wake of a series of scandals. Failures and Abuses of Defined Benefit Pension PlansHowever, the law’s strict standards ultimately played an important role in encouraging employers to move toward defined contribution pension plans.

The shift from guaranteed lifetime income from annuities to tax-deferred 401(k) plans isBig risk shift” This is a major factor that puts many retirees at risk of a decline in their standard of living after retirement.

401(k) plans have worked well for many years, especially for high-income workers employed by large companies with strong, low-cost plans. About half of the workers There are no options for retirement savings plans, and many people who work for small businesses end up with expensive, poor quality plans that take huge amounts of money out of their savings.

This year’s ERISA anniversary will spark many discussions about how to improve and expand access to defined contribution benefits – and those discussions are worthwhile.

But we are hopeful that this anniversary and this fall’s election will inject new energy into our efforts to improve and expand Social Security and Medicare.

Social Security and Medicare Finances

Both Social Security and Medicare face long-term solvency challenges.

Social Security this year Trustee’s Report It projects that the combined retirement and disability systems will go bankrupt in 2035, a year later than it predicted last year. To be clear, this does not mean that the pension systems will run out of money to pay benefits. Rather, it refers to the year that the massive Social Security Trust Fund, currently at $2.78 trillion, will run out of funds.

Yet, unless Congress acts, the program’s cash reserves in 2035 will only be enough to pay current and future recipients 83% of their promised benefits. In other words, recipients would face a disastrous 17% reduction in benefits.

The situation is not as dire, because Medicare gets its funding from a variety of sources: This year, the board projected that the Hospital Insurance Trust Fund, which funds Medicare Part A, will run out in 2036 (five years later than in last year’s report). General government revenues and premiums are adjusted annually to projected costs, so funding for other parts of Medicare will not dry up.

In the event of the Hospital Insurance Trust Fund becoming insolvent, there would be enough money from current revenues to cover 89% of benefits.

How to restructure social security finances

Opinion polls consistently Most Americans want to raise new revenue to support both Social Security and Medicare, and I agree.

Democrats generally advocate raising taxes on the wealthy to extend Social Security’s solvency, while Republicans want to solve the problem by cutting benefits.

President Joe Biden’s latest budget proposal calls for higher-income earners to shoulder more of the burden.

Democrats want to raise the payroll tax cap and plan to impose a new tax on investment income, a range of proposals that would restore affordability from 2032 to 2075.

These plans provide modest expansion of benefits, especially for the most vulnerable retirees.

• of Social Security Expansion Act The bill would raise benefits across the board by about $200 a month, implement more generous annual cost-of-living adjustments, and add additional increases for very low-income workers.
• Social Security 2100 would slightly raise benefits across the board, increase welfare payments, reduce the share of retirees whose benefits are subject to income tax, and increase benefits for widows.

Meanwhile, Donald Trump, the leading Republican presidential candidate, has consistently maintained that he will leave Social Security untouched, but leaving it alone would mean cutting benefits by 17%, which is not a policy solution.

Republican solutions are centered on cutting benefits. They propose gradually raising the retirement age — the age at which you can receive 100% of the benefits you’ve earned. They also want to introduce means-tested benefits that would reduce payments to high-income families.

Advocates for raising the retirement age often say that it makes sense to lower the eligibility age because “we’re all living longer.” But this increase in life expectancy is mainly affecting the more educated and higher-income groups. And this argument masks the fundamental problems that arise from raising the full retirement age.

• This would act as a benefit cut because it would raise the threshold for how long people must wait before receiving the full benefit they have earned. The increase in the retirement age enacted in 1983 This amounts to an effective benefit reduction of 13% for workers born after 1960, due to an increase in the full retirement age to 67. Raising the full retirement age to 70 would result in a further reduction of about 20%.
• The assumption is that people will simply work longer to cover the cost of living, but it’s often the less-educated workers in manual jobs who rely most on Social Security, and the pandemic appears to have brought about a shift in expectations about working longer hours. Federal Reserve Bank of New York Study The report finds that the share of American workers who expect to continue working full-time into older age has fallen sharply, especially among women and lower-income workers.

There are sharp political divisions between the parties on how to steer the government in the right direction.

“Many Republicans are focused only on cutting benefits, while Democrats are focused only on raising taxes,” said Paul N. Van de Water, a senior fellow at the Center on Budget and Policy Priorities. “Most analysts believe a combination of both is needed to solve the problem, but as long as both sides take these positions, it will be much harder to reach a compromise.”

If this situation continues, I suspect Congress will turn to another solution – an emergency injection of general government revenue – to avoid bankruptcy and benefit cuts.

The logic behind a general revenue solution is straightforward: even if a flat reduction in benefits could be agreed as the bankruptcy deadline approached, the size and timing of the cuts makes the math just not work.

How to fix Medicare finances

The Biden administration’s latest budget proposal: Revenue Adjustment It would fund a hospital insurance trust fund that would focus on higher-income households and businesses, and would expand Medicare’s negotiating power with drug companies by allowing the fund to take money saved from its new authority to negotiate drug prices.

The Republican Study Committee, which represents a majority of Republican lawmakers, is considering privatization to solve Medicare’s financial problems. Budget planning This year they are calling for the introduction of “premium support” or vouchers, although the idea has been proposed at various times for more than a decade.

All parts of Medicare would be combined into a single program provided by private insurers through a combination of government assistance and out-of-pocket payments, with seniors using vouchers to purchase health plans.last yearThe RSC plan called for raising the eligibility age to mirror the full Social Security retirement age.

The argument that privatization would save money is simply at odds with recent evidence of what is already happening in Medicare.

Medicare Advantage, which provides Medicare coverage through private health insurers, already costs taxpayers and premium-paying members much more than traditional fee-for-service Medicare.

The Medicare Payment Advisory Commission, which advises Congress on policy, Recently reported Medicare is estimated to pay Medicare Advantage plans 122% of the costs for similar beneficiaries in traditional Medicare this year, which means $83 billion in additional Medicare spending in 2024 and $13 billion more in Medicare Part B premiums paid by Medicare beneficiaries in 2024.

When will Congress act on Social Security and Medicare funding?

Because this is an election year, we cannot expect Congress to address the shortfalls in Social Security and Medicare in 2024.

Optimists believe action on Social Security could come as soon as 2025. One of them is Martin O’Malley, the recently appointed Social Security Commissioner.

“A 17 percent cut in benefits would be a big blow to people who are living from benefit to benefit,” he told me in a recent interview. “This program has done a lot to lift many seniors out of poverty, and it’s inconceivable that Congress won’t act to strengthen this program in the near future.”

The more pessimistic view? Social Security will approach the solvency cliff, followed by a general revenue bailout.