Debt Digest | How to ‘Fix’ Medicare and Social Security Without Cutting ‘One Penny’

Links & Fiscal Facts

• Slow the growth in Medicare and Social Security benefits. The New York Times reports that “The new [Republican Party] platform also affirms Mr. Trump’s position on Medicare and Social Security as the Republican Party’s stance, saying that Mr. Trump ‘will not cut one penny’ from either program. The 2016 platform, in contrast, stated, ‘We reject the old maxim that Social Security is the ‘Third Rail’ of American politics’ and that ‘all options should be considered to preserve Social Security.’” One way to avoid cutting a penny from either program while addressing their financial unsustainability is slowing the growth in the cost of benefits. As illustrated in a previous Digest, the combined lifetime benefits for Social Security and Medicare for an average couple are projected to double in real terms from 2005 to 2050, reaching $2 million. Ways of slowing the growth in benefit generosity include 1) indexing initial Social Security benefits to inflation instead of wage growth, which could close 80 percent of the program’s long-term funding shortfall; and 2) capping the Medicare subsidy and giving Americans direct access to their Medicare dollars, cutting out government as the middleman. Read this paper by John Cogan with the Hoover Institution at Stanford for a better understanding of how to limit the cost growth of Social Security and Medicare “without impairing the safety net of assistance they provide.”

• A political incentive for Republicans to reform Social Security. Addressing former President Donald Trump’s claim that he won’t touch Social Security and Medicare, Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University, writes: “[A]s more and more observers start to realize that our debt trajectory could/will become a bigger problem than it is now, there may be a political advantage in reforming the program and start reforming it now.” She explains: “[I]f Republicans reform Social Security upon regaining power, the CBO would show an enormous improvement in the fiscal outlook — a potentially huge win that Republicans can use to reclaim the mantle of fiscal responsibility. The evidence, for once, will be easily seen in the numbers.” To illustrate the potential significance of these numbers, it is worth noting that Social Security’s 75-year unfunded obligation of $25.2 trillion is comparable in size to the entire publicly held debt or the US economy as measured in annual gross domestic product.

• Most of Medicare is not funded by payroll taxes. The Congressional Research Service (CRS) recently released an overview of Medicare, which includes a summary of the program’s revenue sources. Figure 2 illustrates that only Medicare Part A is financed through payroll taxes, while the majority (65 percent) of the entire program’s funds comes from other sources, including deficit spending. Medicare’s finances are unsustainable, with the program being responsible for $449 billion in deficits (including associated interest costs), or 27 percent of the entire 2023 federal budget deficit. Furthermore, Medicare’s trust funds are merely accounting ledgers with no real assets. As my colleague at Cato, Michael Cannon has written: “There are no funds in the Medicare ‘trust fund.’ [...] those ‘trust funds’ contain nothing but ‘funny money.’”

  

• Uncapping the payroll tax is a bad idea. Maxwell Tabarrok from the Institute for Progress (IFP) reviews the “Taxation and Innovation in the 20th Century” paper by Ufuk Akcigit, John Grigsby, Tom Nicholas, and Stefanie Stantcheva, highlighting the main finding of the paper: “A one percent increase in the marginal tax rate for 90th percentile income earners decreases the number of patents and inventors by 2%. The corporate tax rate is even more important, with a one percent increase causing 2.8% fewer patents and 2.3% fewer inventors.” This finding underscores one of the problems with eliminating the Social Security payroll tax cap (that is taxing all earned income), which would raise marginal tax rates for higher-income earners by 12.4 percentage points. Such a change could reduce US innovation significantly. Furthermore, it would be an ineffective solution on its own, only addressing half of Social Security’s long-term funding shortfalls. For more effective solutions that can fix Social Security’s financing problems—without the adverse effects on innovation and economic growth a massive upper-income payroll tax increase would entail—see here.

• A new emergency spending deal will exacerbate the federal debt. According to the Committee for a Responsible Federal Budget (CRFB), “[...] Senate Appropriations Chair Patty Murray (D-WA) and Vice Chair Susan Collins (R-ME) have reached a tentative deal to boost Fiscal Year (FY) 2025 appropriations levels by $34.5 billion by designating some ordinary spending as emergency funding. [...] If enacted and continued without offsets, this increase would add more than $350 billion to the debt through 2034. Along with the other side deals, this would reverse more than half of the $1.5 trillion of savings achieved by the Fiscal Responsibility Act.” As Dominik Lett and I have written: “Irresponsible emergency spending practices have eroded fiscal norms, contributing directly to America’s mounting debt challenge. [...] Myopic spending practices [such as designating regular spending as emergency spending to get around fiscal limits) harm the fiscal credibility of the federal government, elevating the risk of a devastating fiscal crisis.”