Social Security and Medicare: Troubling math, tough politics

THE CHALLENGE

It's a math problem that requires a political solution.

Payroll taxes largely fund Social Security and Medicare. They generally get deducted from workers' paychecks, which is why Biden, a Democrat, says people are merely getting back what they've already paid into the system.

But as more baby boomers age and retire, there are more beneficiaries and not enough tax revenue to fund the programs. Payroll taxes are expected to generate $1.56 trillion this year, but the combined costs of Social Security and Medicare are likely to be $2.16 trillion, according to a Congressional Budget Office report last week. The office warned in its report that Social Security benefits may need to be cut even earlier than past projections, beginning in 2032.

CBO Director Phillip Swagel said Friday at a Bipartisan Policy Center event that “benefits today are being paid in full as promised, drawing down on the Social Security trust fund.” But when the government is unable to pay full benefits, “that’s a challenge,” he said.

The number of people enrolled in Medicare has more than tripled to roughly 65 million since its inception in 1966. More than 10 million new retirees and disabled people joined in just the past decade, according to data from the Centers for Medicaid and Medicare Services.

The shortfall in tax revenues combined with a rising number of recipients would eventually lead to Social Security’s trust fund being unable to fully pay benefits in 2035, a Social Security and Medicare trustees report predicted last June, though the CBO said it could happen sooner. Medicare’s trust fund would be unable to pay full benefits starting in 2028.

This forces the inevitable choice of whether to shore up the trust funds' finances or reduce people's benefits. Continued delays by Congress and the president in addressing this math problem could narrow the number of potential fixes.

WHAT ARE THE SOLUTIONS?

There is basically some combination of four options:

— Raise taxes.

— Change benefits such as the eligibility age.

— Cut costs.

— Rely more on general revenues to cover the gap, which could mean higher budget deficits or cuts to other programs.

Biden took a step last year with his Inflation Reduction Act, which would allow Medicare to negotiate lower prices on a handful of drugs and charge drug companies when they raise the price of drugs faster than inflation. The law also makes vaccines free, caps monthly out-of-pocket insulin costs at $35 and limits out-of-pocket drug expenses at $2,000 starting in 2025.

The CBO said the prescription drug components of the law would save $237 billion over 10 years, prompting some Republican lawmakers to say it was a spending cut that would dig into pharmaceutical companies' profits, forcing them to limit how much they spend developing new treatments. But the law aims to lower the cost people pay for medication, rather than ax benefits.

Democrats are also trying to rein in spending on the increasingly popular -– and expensive -– Medicare Advantage program, a network of private insurance plans that are reimbursed by the government. Recently, 70 Democrats signed a letter to the president asking his administration to crack down on scams and wasteful spending in the program, which federal investigators say has cost taxpayers billions of dollars.

Sen. Mitt Romney, R-Utah, has pushed legislation that would create bipartisan committees to look at ways to salvage the Social Security and Medicare trust funds. The bill has gone nowhere but has limited bipartisan support, including from Senate Democrats Joe Manchin of West Virginia and Mark Warner of Virginia.

Payroll taxes were capped last year at $147,000 — meaning no one paid the taxes after surpassing that threshold. In 2019, Rep. John Larson, D-Conn., proposed a bill that would reinstitute the payroll tax at earnings above $400,000.

Last year, members of the House Republican Study Committee proposed raising the age at which someone could qualify for Social Security and Medicare. Right now, people can access their full Social Security benefits at 67, an age minimum that’s increased by two years since the program was first established nearly 90 years ago. You must be at least 65 to access Medicare.

Last year, Sen. Rick Scott, R-Fla., laid out a plan to require Congress to reconsider all federal laws every five years — leading to criticism by Biden that Social Security and Medicare would be cut. That idea has received an ice-cold reception with Senate Minority Leader Mitch McConnell, R-Ky, saying it will “not be part of our agenda.”

After several months of flak, Scott on Friday revised his plan to specifically exclude Social Security and Medicare.

The CBO has also laid out nearly 60 policy options that could save the federal government billions of dollars on Medicare, including higher monthly premiums for some older and disabled adults.

THE POLITICS ARE TOXIC

In his State of the Union address, Biden got boos from GOP lawmakers when he said that some Republicans want to cut spending for the programs. It led to an improvised standing ovation for seniors as both parties on the spot committed to avoiding any cuts to Social Security and Medicare.

Put simply, voters like low taxes and generous benefits. This means it can be politically suicidal to overhaul either program. Any change can be used against a lawmaker seeking reelection, especially as 2024 looms. For the past two weeks, Biden has been giving speeches in key states such as Wisconsin and Florida in which he warned that some Republicans would gut the programs, despite the GOP denials.

Why are the politics so bad?

It's because of the composition of the electorate. AP VoteCast found that nearly six in 10 voters in last year's midterms were older than 50. Of that group, three in 10 were 65 or older. This means that a dominant bloc of voters already benefit from these programs or are on the verge of doing so.

REFORM IS POSSIBLE

Go back 40 years to 1983.

President Ronald Reagan, a Republican, and House Speaker Tip O'Neill, a Democrat, struck a deal to extend the life of Social Security, which was facing insolvency. The amendments to the program raised the retirement age, delayed the cost-of-living adjustment by six months and mandated that government employees start paying into Social Security, among other changes.

When Reagan signed the law on April 20, 1983, he said: “This bill demonstrates for all time our nation’s ironclad commitment to Social Security. It assures the elderly that America will always keep the promises made in troubled times a half a century ago. It assures those who are still working that they, too, have a pact with the future.”

In the 1984 elections, there was little political fallout. Reagan won a second term in a landslide, while Democrats held onto the House.

THIS IS A GLOBAL PROBLEM

It's not just the U.S. There's pushback in other countries amid efforts to restrain costs tied to an aging population.

There have been repeated protests in France over French President Emanuel Macron’s plans to raise the minimum retirement age for a full state pension from 62 to 64. Nearly 1 million people marched in Paris, Nice, Marseille, Toulouse, Nantes and other cities on Feb. 11, with Parisian police officers saying they arrested eight people for violations that included vandalism and possession of a firearm.

In the Chinese city of Wuhan last week, seniors belted out the communist anthem “The Internationale” in protest of the government cutting health care benefits.

In a recent analysis for the International Monetary Fund, Harvard University's David Bloom, an economics professor, and Leo Zucker, a research assistant, said that aging worldwide creates “a colossal set of health, social, and economic challenges in the coming decades.” They warned about the costs of inaction if there are not enough workers to fund health care benefits for older people, leading to more disease and a lower quality of life.

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Treasury reporter Fatima Hussein in Washington contributed to this report.