Debt Digest | Planless in Washington: The Social Security and Medicare Saga

Links & Fiscal Facts

Here are this week’s reading links and fiscal facts:

• Social Security and private savings are substitutes. Andrew Biggs, a senior fellow at the American Enterprise Institute, writes: “[A] two-earner couple who each earned the maximum salary subject to Social Security taxes, currently $168,000, would retire this year on more than $96,000 in annual Social Security benefits. If that same high-income couple lived in Canada, they would receive $32,750 in combined annual benefits. How would they survive in this frozen libertarian hellscape to the North? The answer is easy: They would have saved more on their own.” Biggs argues that Social Security substitutes private retirement savings, particularly for high earners. Therefore, he suggests reducing benefits for affluent retirees, who “[will] save more and work longer to make up the difference. [...] This provides an opportunity for Social Security reform that protects the seniors who need the program the most without using every penny of fiscal capacity [...]” I concur, “Reducing benefits for higher income earners to keep program costs in check [...] is a better alternative than raising taxes on current workers.”

• Neither party offers a clear strategy to save Social Security and Medicare. A recent NPR Marketplace Morning Report discusses the new GOP platform that promises to save Social Security and Medicare without cutting benefits. The report also highlighted President Biden’s plan to tax high-income earners. During the segment, I shared my concerns about the effectiveness of Biden’s plan: “[T]he math, unfortunately, doesn’t work out, [...] There isn’t enough money at the very top to close the Medicare and Social Security funding gap.” Also see Brian Riedl’s expansive paper on this point here. I also highlighted the lack of a definitive strategy from either political party to address automatic benefit cuts looming in the 2030s, noting, “neither party has a clear plan to avoid that.” As I have written before, “a “do-nothing” approach to Social Security [and Medicare] that avoids necessary structural reforms and instead promises to preserve benefits at current levels, comes at a high cost for younger generations.”

• Kamala Harris supported a bill with an estimated cost of $21 trillion. Cato’s Ryan Bourne reviews economics-themed bills sponsored by Kamala Harris, the expected Democratic nominee for president. Among these, the Monthly Economic Crisis Support Act (S.3784) would have handed $2,000 a month to most individuals and dependents until 3 months past when the government declared the COVID-19 emergency over. According to Bourne, “That would have cost [approximately] $21 trillion.” Harris also supported other potentially damaging economic and fiscal policies, such as establishing a $15 federal minimum wage, ending private health insurance, and endorsing “Medicare for All.” 

• Increasing spending on mandatory programs erodes “fiscal democracy.” Urban Institute’s Eugene Steuerle addresses the uncontrollable growth in mandatory spending: “The extent to which these permanent laws have grown undermines ‘fiscal democracy,’ which I measure by calculating the share of new revenues remaining after taking into account the automatic spending growth set by permanent laws enacted in the past. By that measure, today, there is close to zero fiscal democracy. Before members of the new Congress even walk through the doors of the Capitol to be sworn in, almost every dollar of revenue for the year has already been committed.” As Steuerle has written elsewhere, mandatory programs, especially Social Security and federal healthcare, are the main contributors to growing deficits. Reforming these programs is a politically difficult task, which is why Congress should consider establishing a BRAC-like fiscal commission comprised of independent experts to correct their unsustainable growth trajectory.

• Looming insolvency will slash Social Security benefits by 21 percent. Rachel Greszler, a Visiting Fellow at the Economic Policy Innovation Center (EPIC) and a Senior Research Fellow at the Heritage Foundation, discusses the benefit cuts in 2033 when Social Security becomes insolvent: “At that point, the law specifies that Social Security cannot pay out more than it collects from workers’ payroll taxes, which will result in a 21 percent, across-the-board, benefit cut [see Figure 1]. For the average Social Security beneficiary who receives about $22,000 per year in benefits, that will mean a loss of about $4,600.” To avoid such drastic, across-the-board benefit cuts for all beneficiaries regardless of their income, Congress has various reform options, including reducing benefits for wealthier retirees, adopting a more accurate inflation adjustment, or indexing initial benefits to prices. For more solutions that can fix Social Security’s funding shortfalls without raising taxes on Americans, see here.