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The simple message from the trustees of Social Security and Medicare

Courtesy of Social Security Works
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Yesterday, the trustees of our two big social insurance programs — Social Security and Medicare — released their annual reports on these programs’ current and future financial conditions. The reports contain hundreds of pages of technical analysis. But their message is simple: We must preserve these valued programs, which means protecting them against “reformers” who would cut them.

The headlines from the reports tend to focus on the shortfalls in the trust funds designed to ensure the payment of full benefits for both programs. For Social Security, the combined trust funds (one for retirement and the other for disability) are expected to be depleted by 2034, the same forecast as last year. Social Security’s financing shortfall over the next 75 years is projected to be 1 percent of GDP.

For Medicare’s Hospital Insurance Trust Fund, however, there was a negative change: Its depletion date was moved up to 2026, three years earlier than in last year’s report (its shortfall is 0.4 percent of GDP). I’ll explain how this deterioration occurred in a moment; for now, the key point is that it is anything but an inevitable outcome. Instead, it is a function of terribly shortsighted policies that can and must be reversed.

But first, it is essential to understand what “depleted” means in the context of these trust funds. It does not mean that either program is broke and can’t pay benefits. Most of the funding for these insurance programs comes through payroll and income taxes levied on current incomes. Therefore, even if the trust funds go to zero, about three-quarters of Social Security and 90 percent of Medicare benefits will be financed by dedicated revenue.

To be clear, these cuts should by no means be allowed to occur. But beware of scare tactics suggesting that the trust funds are the programs’ only source of revenue. This Politico article, for example, announces that Medicare is scheduled “to go broke three years earlier than expected,” without any qualifying points about how the lion’s share of benefits will still be financed by revenue inflows.

Those are the facts. But in our national debate about “entitlements,” they get framed in two very different ways.

Together, Social Security and Medicare comprise about 40 percent of the federal budget. Thus, if your goal is to reduce the size of the government to help offset the cost of tax cuts for your donor base, they constitute a prime target. You are then highly motivated to rail about trust-fund depletion and the crushing obligations of supporting these programs. The framing, given Social Security and Medicare’s popularity, is “we’d love to support them, but we just can’t afford it. Therefore, we must reform them,” where “reform” is a euphemism, or, more precisely, a weasel word, for cut.

The other frame recognizes that these are efficiently run, essential programs that are highly popular for good reasons: They provide income and health security for those who have aged out of their working years, lost a breadwinner (survivors benefits), or become too disabled to sustain gainful employment. Such social insurance functions exist in every advanced economy, where, especially regarding income security, they are more generous than our versions.

Their pervasive existence across countries is no coincidence: They correct a market failure. There are no private-sector insurers who would guarantee pension and health coverage to aging Americans, regardless of their income. Of course, private insurers would offer such services for the wealthy, but they could not profitably do so for those of modest means.

Some thus suggest means-testing these benefits — reducing or eliminating them for high-income persons — to lower their overall costs. To do so, however, could risk undermining their political support (for the record, parts of Medicare already include means tests). But I’ve also grown suspicious about the motivation for means-testing Social Security. It already has a highly progressive structure, meaning those with low-incomes get more back than they put in relative to high-income retirees (that said, the average monthly benefit is just $1,300). This structure limits the savings to the program from cutting the benefits of the wealthy. My concern is that to fix Social Security through benefit cuts, you’d have to break it — in other words, cut too deeply into the benefits of retirees who need the money.

What is the way forward? Surely, the sooner we tackle these shortfalls, the better. Wouldn’t it be awesome to avoid yet another one of those fiscal cliffs that we know is coming but are too dysfunctional to address until the last minute, when we kludge together some patch?

I found these points from Paul Van de Water, my colleague at the Center on Budget and Policy Priorities, about the deterioration in the HI Trust Fund to be instructive regarding where to go next with this debate. He points out that “much of this deterioration is due to actions by the administration and Congress:

  • enacting the tax law, which reduces income taxes on Social Security benefits, part of which go to the HI Trust Fund;
  • repealing the individual mandate that people get health insurance or pay a penalty, which will increase the number of uninsured and increase Medicare payments for uncompensated care;
  • repealing the Independent Payment Advisory Board, which was projected to help slow Medicare’s cost growth.”

In other words, it is unconscionable to pass $2 trillion in regressive tax cuts (that’s also about 1 percent of GDP over the next decade) and then argue that the nation cannot afford to insure against the economic insecurity caused by old age or disability. This is even more so the case given that the demographic pressures on the programs’ finances have been known for decades. It is equally wrong to argue, as Treasury Secretary Steven Mnuchin did Tuesday, that the economic growth that the tax cuts will allegedly unleash will close the financing gap (the trustees wholly discounted such claims). Clearly, we will need more revenue (my colleague Kathleen Romig offers some good options).

It is equally shortsighted to get rid of mechanisms designed to slow the growth of health costs, as this, too, must be a solution.

To me, and I’m sure I’m not alone, these hundreds of pages of actuarial analyses are telling us something extremely simple. Given how much the majority of us value Social Security and Medicare, we must begin now to raise the revenue and hold down the costs to sustain them. Everything else is just noise.