Policymakers Respond to Warning Social Security and Medicare Trust Funds Running Out Fast

WASHINGTON — America’s safety net programs are running out of money, and fast. All four major trust funds — Social Security Old-Age and Survivors Insurance, Social Security Disability Insurance, Medicare Hospital Insurance, and the Highway trust fund —are heading for insolvency in the next 13 years.

On Aug. 31, 2021, the Social Security and Medicare Trustees released their annual reports on the long-term financial state of the trust funds. The Trustees found that HI will be insolvent by 2026, OASI will run out of reserves by 2033, and the combined Social Security trust funds could be liquidated by 2034. 

These annual reports were the first to incorporate the effects of COVID-19, the recession, response, and anticipated recovery. And they were much anticipated by analysts looking to prevent abrupt and across-the-board cuts down the line.

The good news is that COVID-19 didn’t have as much of a negative impact on HI insolvency as anticipated. It did, however, deplete Social Security one year earlier than previously projected, apparently as a result of less revenue due to the pandemic’s income losses. 

The bad news is that the HI trust fund has been rapidly depleting and Medicare spending is projected to rise rapidly as a share of GDP over the next quarter-century. Furthermore, under current law, Social Security won’t be able to guarantee full benefits to existing retirees, much less provide benefits to any retirees of the future. 

Senator Bill Cassidy, R- La., ranking member of the Senate Finance Subcommittee on Fiscal Responsibility and Economic Growth, along with a panel of analysts, discussed the current status of these major trust funds and potential policy reforms to improve their solvency with the Center for a Responsible Federal Budget, a non-profit public policy organization.

“No one doubts that there is incredible waste associated with [these programs],” Cassidy said. “When I speak with folks about what to do next, I always say… everybody points, but no one ever looks this way,” he added, suggesting pointing to oneself. 

But, Cassidy added, “If you’re [a doctor] getting paid below your cost, you can’t make it up in volume… and this, of course, will affect access for patients. 

“As a doctor, I know the one way you save money is to empower the patient. You can do this by aligning benefits and having gainsharing.”

While all parts of Medicare are rising in spending due to increasing health care costs and an aging population, Medicare Part A, which is used for inpatient hospital services and financed mostly from payroll taxes through the HI Trust Fund, is on track to have its reserve depleted by 2026. That is in just five years.

“This is the closest the [Medicare] Trust Fund has been to insolvency since 1997,” said Josh Gordon, director of Health Policy at CRFB. At that time, a deficit-reduction package, the Balanced Budget Act of 1997, bought Medicare more time with reductions in the growth of payments to providers, expansion of prospective payments to post-acute care facilities, and increased cost-sharing for beneficiaries.

CRFB projects that it will take a 27% increase in the payroll tax or a 16% spending cut to prevent insolvency of the HI Trust Fund with its current shortfall. 

“To get more efficient care in Medicare, we need some aspect of payment reform, and better designed alternative payment models are essential,” Michael Chernew, professor of Health Care Policy at Harvard Medical School said. Echoing Cassidy, he added, “Controlling volume is a lot harder than controlling prices.”

“There are policy changes that can both prevent insolvency and protect patients,” said Gretchen Jacobson, vice president of the Medicare Program at the Commonwealth Fund.

Options focused on reducing Medicare costs include reducing payments to Medicare providers, including one for post-acute care payments and another for reimbursement of bad debts. Other policy considerations include equalizing payments across sites of care, reducing Medicare Advantage payments, and reducing prescription drug costs, as well as unique spending options like establishing a “Graduate Medical Education” fund outside of Medicare. 

On the revenue side, tax policy considerations include increasing revenue from the Medicare payroll tax from 2.9% (3.8% for high earners) up by a half percentage point, applying the 2.9% tax to employee compensation from employer-provided health insurance, and applying the payroll tax to a broader base of self-employment income. Additional creative policy suggestions include dedicating an imposed tax on sugar-sweetened beverages to the HI Trust Fund.

And while it has a bit longer, the Trustees report shows that time is running out on the Social Security Trust Fund as well. The program will run cash deficits to $2.4 trillion over the next decade and completely exhaust its reserves without a policy fix. 

Under current law, upon insolvency, Social Security benefits will be reduced across-the-board by 22%.

“Saving Social Security from a 22% across-the-board benefit cut, which is massive, isn’t just an imperative… it’s actually an opportunity,” Marc Goldwein, senior vice president and senior policy director at the Committee for a Responsible Federal Budget said. “Social Security is more intertwined into the economy than almost any other government program. Smart changes to Social Security can actually enhance economic growth.”

CRFB said that a plan to restore solvency to the program over the next 75 years could require increasing payroll taxes by 27%, reducing spending by 21%, or a combination of both. Potential solutions could include cuts to new beneficiaries, though Trustees warned that even eliminating benefits for new beneficiaries in 2034 would not be enough.

Rep. John Larson, D-Conn., chairman of the House Ways and Means Social Security Subcommittee has his own take, and will imminently be introducing a new bill, called Social Security 2100: A Sacred Trust, aimed at increasing — not cutting — benefits, which he believes could also extend the program’s solvency.

“The Trustees Report confirms that Social Security’s financing is strong in the near term yet underscores why it is so important that Congress take action now to prevent 22% in cuts across the board on all benefits in 2034,” Larson said. 

His bill would propose increased benefits for all Social Security beneficiaries, a cost-of-living adjustment to reflect inflation, and even restoring student benefits (up to age 22) for the dependent children of disabled, deceased, or retired workers. To pay for this, he suggests adjusting the payroll wage cap, reimposing the payroll tax after $400,000 in wages. 

“It has been 50 years since Congress has done anything to improve benefits,” Larson lamented in a statement on the Trustees report. “Social Security is a lifeline for many beneficiaries and a program Americans pay into their entire working lives. The COVID-19 pandemic has underscored just how important this program is to our country, never missing a payment even during economic downturns. We must work to expand benefits now and strengthen the program for today’s seniors and generations to come.”