Social Security and Medicare: Are The Wells Running Dry?
May 1, 2020
In January of 1940, American retirees began receiving Social Security checks. Years later in January of 1966, the Medicare healthcare system became operational. For decades, both of these programs have benefited our nation’s seniors more than anyone could ever have imagined. However, it has now become a virtual certainty that unless something is done to strengthen these trust funds financially, they will be depleted. Does this mean that both of these programs will go bankrupt? Thankfully, the answer to that question is no. What it does mean is that both of these programs are now in negative cash flow. As such, it has become necessary to supplement the tax revenue provided by the Federal Insurance Contributions Act (FICA) and Medicare payroll taxes with money from these trust funds to cover the outlays of these programs. Eventually, if this practice continues both trust funds will be depleted.
Over the years, these funds have grown and sizable cushions have been created. This occurred because the revenue generated from these payroll taxes and other sources was larger than the amount of money necessary to cover the benefits that were being paid out. For reasons that I will explain below, this is no longer the case.
There are several reasons why these funds are being depleted. One reason is that in 1960 there were five people working and contributing into the system for every person who was collecting benefits. Today there are only 2.8 people contributing for every person collecting benefits. Less people contributing and more people collecting results in negative cash flow.
The revenue generated by FICA and Medicare taxes is not sufficient to cover the amount of benefits being paid out from these programs. It has therefore become necessary to dip into the reserves. At the end of 2018 the Social Security trust fund had a balance of $2.9T. The amount of money left in the Medicare trust fund was just $200B. The latest projections show that the Social Security trust fund will be exhausted in the year 2035 and the Medicare trust fund will run dry by 2026. Because of the other demands for money facing the US government, funding for these programs is not assured.
This problem will continue indefinitely because Americans are not having enough children to replace themselves. According to the Centers for Disease Control and Prevention (CDC), Americans would need to reproduce at a rate of 2100 births per 1000 women of child-bearing age. Currently, the US is reproducing at a rate of only 1765 children per 1000 women of child-bearing age. This number is just under 16% less than the number needed to maintain our population. This number does not take into account people immigrating into our country. Therefore, less people being born results in less people growing up, entering the workforce, and paying taxes into the system. In a word, the problem is demographics.
Another problem that both of these programs are being forced to deal with is the yearly Cost of Living Allowance (COLA). The COLA is set by the Bureau of Labor Statistics (BLS) every year. This increase is based mostly on the Consumer Price Index (CPI). Over the last decade or so this economic indicator has hovered around 2% per year. These increases have therefore not been a major concern. If however, the inflation rate were to return to the double digit rates of the late 1970s and 1980s, the CPI would also increase and that would put both programs under increased financial stress. If this were to occur, quick and decisive action on the part of Congress would be necessary.
On occasion, the American capitalist economy is prone to enter into recession. It is the nature of the beast. Our economy is also prone to experience periods of substantial and prolonged economic growth. During the recession of 2008 and 2009, the US economy contracted, and millions of jobs were lost. When job losses occur, the government collects less revenue from payroll taxes than it would under normal conditions. FICA and Medicare revenue are therefore reduced, making it necessary to dip into the reserves of the two trust funds. How serious the problem becomes depends on how long the downturn lasts.
We are now in the midst of the coronavirus pandemic. The country is suffering from the most significant number of jobs losses since the great depression. As of May 15, the country had lost roughly 36 million jobs. In 1939, the US unemployment rate reached a high of 23%, which was, and I believe still is, the highest rate in our country’s history.
The unemployment rate at the end of April was 14.7% according to the BLS Whether we surpass that record will depend on how long this crisis goes on. The length of this crisis will also determine how much damage is done to the Social Security and Medicare programs.
The Medicare Trust Fund is experiencing many of the same problems as the Social Security Program. The difference is that these same problems are more pressing when discussing Medicare than when discussing Social Security. This is because the Medicare Trust Fund is much smaller than the Social Security Trust Fund. It is currently about $200B and is projected to be completely depleted by the year 2026. This will mean that the Medicare program will be funded solely by the Medicare payroll tax. It also means that unless something is done to remedy this shortfall, the Medicare program will be able to cover only 89% of each claim submitted. Further, if action is not taken by Congress to provide additional revenue to the system, the percentage of each claim covered will drop to 78% by 2042.
Medicare Part A is the only part of the Medicare plan that will be affected by this revenue crunch. Part B and Part D will continue to be funded by the premiums deducted from social security checks every month.
The good news is that there are steps that can be taken to strengthen the financial positions of both of these funds. These steps would obviously include finding ways to increase revenues and to cut costs where appropriate.
Finding ways to increase revenue is not that difficult. Getting our elected officials to get off their butts and do the work is another issue. Congress has a whole host of strategies that can be used at their discretion. The problem is fixing these programs in such a way that is the least unpopular to the taxpayer and also the least painful to the plan’s recipients. The main problem here is not Social Security and Medicare—it is the politics. After all, we wouldn’t want any of our dedicated, hardworking Congressmen and Senators getting voted out of office because they failed to make the right decision. That’s why they’re sitting on it. Whatever way they decide to go, some group of either taxpayers or seniors is not going to be happy. This is why, in my opinion, nothing has been done to fix this problem.
These problems could be dealt with before they reach crisis stage. Wake up Congress, crisis stage is right around the corner! It’s time for you to get to work and solve this problem along with the many other problems that we, as a country, are facing. Solving problems is what we pay you to do. DO YOUR JOB.
Choice number one would be to simply increase the tax rates modestly for both FICA and Medicare. As unpopular as this would be with taxpayers, it would solve the problem and save these two programs for years to come.
Another possible way to increase revenue to these funds would be to raise the maximum limit of an employee’s payroll that is subject to these taxes. The current maximum for calendar year 2020 is $137,700. This could be done slowly over several years, which would probably be more palatable to the taxpayers, or it can be done all at once. Another possibility would be to eliminate the cap altogether.
There is also the option of decreasing the amount of outlays of both of these programs. One possible change that could be made is to raise the age of eligibility to qualify for benefits. This could be done slowly, over years, by raising the minimum age to collect Social Security benefits by one month per year. In other words, at the end of twelve years the minimum age required to collect these benefits would be 63 years of age. The same thing could be done with the Medicare program: Increase the age of eligibility by one month per year. After twelve years the minimum age to be covered by Medicare would be 66 years of age. This adjustment to Medicare would have to be coordinated with the private insurance industry to make sure that there is no lapse in coverage for anyone.
Another option available that could reduce the level of outlays to the system would be to reduce the yearly COLAs. As an example, suppose the Consumer Price Index (CPI) for 2021 was 2%. In that year, instead of raising benefits by 2%, raise them by only 1.5%. In every succeeding year do the same thing. Set the COLA slightly less than the yearly CPI. Over the course of several years this change would help to put these programs on a stronger financial footing.
Raising the age of eligibility and cutting yearly COLAs to less than the rate of the CPI would strengthen the financial situation of both of these funds over time. If these steps were done in conjunction with raising the limit of payroll subject to FICA and Medicare payroll taxes, those steps alone may be sufficient to solve the problem of negative cash flow. Raising the tax rate of FICA and Medicare taxes should only be done as a last resort.
For those of you who read this blog regularly you know that my fallback position is almost always not to raise taxes. Doing that reduces the amount of money in the hands of consumers and that lowers consumer spending and thus economic growth. In this particular case however, most of this money will be paid out in the form of social security benefits, which will in turn be spent by retirees in the marketplace. This will spur economic growth, create jobs, and make the lives of our seniors a little bit better.
The remedies that I discussed above to strengthen the Social Security system could also be used to save Medicare. In addition, the only other strategy that I can think of would be to lower the reimbursement rates to Medicare providers. The downside of this is that hospitals may choose to take less Medicare patients or refuse to accept them altogether. Whether or not this is done would depend on the average number of empty beds that are available in each hospital on a daily basis.
Every hospital in the country is required by law to provide emergency life-saving treatment to anyone who is in need, regardless of their ability to pay. Once the emergency is over and the patient is stabilized, the hospital may move the patient to a different facility that will accept them. The point that I am trying to make here is that hospitals are not required to accept Medicare patients if there is no emergency. They therefore have the option to not accept Medicare patients. This would be more likely if reimbursement rates were lowered.
Currently, I know of no hospitals in my home area of upstate New York that would refuse to accept a Medicare patient. That said, if reimbursement rates to hospitals were cut, the option would exist for hospitals to do just that. There is another relevant point regarding this issue: it may not be in the best interest of hospitals to have empty beds. It is a benefit for hospitals to fill those beds even if it’s with Medicare patients. Although these Medicare patients would not generate the same amount of revenue that would be realized by patients with private insurance, they would at least generate some revenue to the hospitals. Some revenue is better than no revenue.
It is now pretty much a foregone conclusion that both the Social Security and the Medicare trust funds will be depleted in a relatively short period of time. When these trust funds are exhausted the only remaining source of revenue available to pay benefits will be the Social Security and Medicare payroll taxes. If these problems are going to be solved, Congress will have to act. The faster this happens the easier it will be and the better for all concerned, especially our seniors.
As mentioned above there are several steps that can be taken on both the revenue side and the cost side of these programs. Some of these fixes will solve the problem quickly but cause more pain to the taxpayer. Others will remedy the situation over several years and cause less pain. The choice is up to Congress which means that they will wait until the last possible minute to take action. It costs the US taxpayer $5B per year to fund Congress. If you think we’re getting our money’s worth, I’ve got a bridge in Brooklyn I’d like to sell you.
It is no longer a question of whether these funds will be depleted; it is a question of when. These time frames may be shortened depending on how severe and how long this coronavirus pandemic goes on. If it is short lived, the Medicare trust fund will be exhausted in roughly six years. The Social Security trust will be depleted in about fifteen years. When that point is reached, payment of benefits will depend solely on FICA and Medicare payroll taxes.
If this becomes the case, Medicare claims will be paid at 89% of the amount that would ordinarily have been paid. Social Security recipients will receive only 80% of what would normally have been due.
The cause of the reduction in benefits in these programs will be the result of negative cash flow. These programs have been in negative cash flow for years and the chickens are now coming home to roost. Unless the government acts to either increase revenue to these programs or lower outlays, it will be impossible to pay these benefits at 100% of what was due.
The problems confronting the Social Security and Medicare programs are not insurmountable. They didn’t just appear out of thin air and surprise everyone. Our elected officials and the unelected bureaucrats who administer these programs have been aware that this problem was coming for years. After all, it doesn’t take a PhD in economics to figure out that if you’re spending more than you’re taking in, eventually you go broke.
I have discussed several remedies that if taken together would result in moving both of these programs into positive cash flow and back on the road to financial viability. These fixes are not that complicated—which makes me wonder why they haven’t been implemented. This leads me to believe that the problems facing these two entitlement programs are not the major difficulty. It would appear that getting Congress to act may be a more difficult problem to overcome than actually solving the financial problems of these two programs.
