The downward spirals have begun. The combined Social Security trust funds—one for disability, one for retirement—as well as Medicare’s hospital-insurance trust fund, will begin eating into their reserves this year, according to reports released this week by the programs’ trustees. The trust funds for these safety-net programs are now projected to diminish until they are depleted. The Medicare hospital-insurance fund is projected to run dry in 2026.
In one way, this week’s announcement was surprising. Last year the trustees said it wouldn’t be necessary to tap Social Security’s reserves until 2022; the Medicare fund was deemed stable until 2023. Then again, the bipartisan trustees have for several years been warning that Social Security and Medicare finances need fundamental repairs or people are going to get hurt. The benefit and revenue schedules are badly out of alignment. Repeatedly failing to address the problem heightens the risk that it eventually will become too large to solve.
Along with Robert D. Reischauer, I served as a public trustee of Social Security and Medicare from 2010-15. In 2014 we warned in our annual message to the public that “continued delay in legislating corrective measures is likely to make the challenge ever more difficult to resolve and result in undesirable consequences.” In 1993 the first public trustees to publish such messages warned of “the need for congressional action to ensure the continued viability and fiscal integrity of these important national programs.” Everyone in Washington was aware of the magnitude of the problem, the need for repair, and the danger that delay would make inevitable corrections more painful.
This year’s reports show that keeping Social Security solvent would require corrections equal to prospective benefit reductions of 21% across the board. Had lawmakers acted decades ago, such a severe solution might not have become necessary. If they continue to ignore the problem, the remedy will be even worse.
From the mid-1980s through 2009, Social Security took in more in tax revenue than it paid out in benefits, which allowed it to build up its trust-fund reserves. In 2010 Social Security’s expenditures began to exceed its tax income, so it began to rely on its trust funds’ interest earnings, paid from the government’s general fund.
Now Social Security’s tax and interest income are together no longer enough to cover its outlays, so the program needs to start dipping into the trust-fund principal. These reserves were never sufficient to keep Social Security afloat for the long haul, but their existence made it easier for lawmakers to defer action.
Medicare, by contrast, never maintained such substantial reserves. The assets in the hospital-insurance trust fund are currently sufficient to finance only about eight months of benefits. Medicare’s smaller trust-fund balance means that even modest changes to annual operations can dramatically accelerate its projected insolvency. This year that came in the form of updated data showing payroll-tax revenue lagging behind previous projections, while Medicare spending ran higher than expected.
The annual press focus on the projected insolvency dates has always been somewhat misplaced. What’s really important is the magnitude of the shortfalls and the difficulty of correcting them, which grows every year. Whether depletion was distant or near, the problem had to be confronted sooner rather than later. Unfortunately, later has come sooner than the trustees thought it would.