The presidential election campaign has dragged on for months, but the candidates have yet to seriously address one of the most important issues: How to finance the cost of Social Security and Medicare benefits for the nation’s growing numbers of older citizens. Both entitlement programs are on unsustainable spending paths, and continuing to ignore the problem means the cost of a fix will soar even higher.
Fuzzy government spending proposals from Republicans Ted Cruz and Donald Trump would lead to even larger federal deficits, according to many economists. Ditto for the spending plans of Democrat Bernie Sanders. Hillary Clinton has issued detailed proposals to expand Social Security and protect Medicare from budget cuts. She also would raise taxes to help pay for these proposals. But cutting overall federal deficits has not been a campaign objective.
A recent set of spending projections from the non-partisan Congressional Budget Office shows a scary set of numbers:
- In 2015 Social Security outlays were $882 billion and health spending (mainly Medicare and Medicaid) totaled $1.03 trillion, for a total tab of $1.9 trillion, or 52% of total federal spending of $3.7 trillion.
- In the year 2020, the bill for these two sectors is projected to rise by 32% to more than $2.5 trillion—$1.14 trillion for Social Security and $1.4 trillion for health care.
- By 2025 that spending is expected to reach nearly 60% of federal spending, or $3.4 trillion—$1.5 trillion for Social Security and $1.9 trillion for health care.
Meanwhile Social Security is now spending more each year than it takes in, and the trust funds will be depleted in 2034. At that time, payroll tax collections will only bring in enough revenue to cover about three-fourths of promised benefits. And Medicare's hospital fund will run out in 2030.
Solving these shortfalls won't be easy. Whenever Washington finally decides to deal with them, you can expect a fierce battle between fiscal hawks pushing to reduce benefits and those seeking to maintain or even increase them. Still, I don't see any way to deal with these deficits without a combination of higher taxes and benefit cuts.
What can you expect in the way of specific changes? I don't have a crystal ball, but it's increasingly likely that Social Security and Medicare will no longer be universal benefit programs. Instead, they will evolve into welfare programs, with benefits even more sharply skewed to lower-income recipients. Wealthier Americans, who have been paying more for these benefits, may end up paying more and possibly receiving lower payments in return. Here are the major proposals you can expect to hear about:
New Limits for Social Security
The good news is that Social Security is fixable, given a few changes. We missed a great chance to do this when the 2010 Simpson-Bowles plan could not muster enough political support. Specific numbers for possible adjustments have changed, but the basic choices are the same.
- Social Security’s cost-of-living adjustments, which already have seemed unfairly skimpy of late, may be reduced by using a less generous measure of consumer inflation.
- The annual Social Security wage ceiling for payroll taxes may rise sharply. Payroll taxes used to be collected on 90% of the nation's wage income, but that level has fallen to 81%, as a result of the growing tilt toward wage gains for the wealthy. To get back to the previous funding level, the payroll tax ceiling would need to rise to $250,000 vs. the current level of $118,500.
- The full retirement age for benefits already is set to rise from 66 to 67 for those born in 1960 or after. Gradually raising the age 70, as some have proposed, would be consistent with the today's increased longevity. But to be fair, this change should be accompanied by boosts in benefits for workers forced by health problems or unemployment to claim at younger ages.
- Higher payroll taxes are likely to be part of the cost of narrowing the spending gaps for both programs. Raising the combined employer-employee Social Security tax from 12.4% to 14.4% over 20 years would eliminate roughly half of the system’s projected 75-year deficit all by itself.
Medicare Becomes Managed Care
Medicare is a far more difficult funding challenge. Payroll taxes for Medicare do pay for Part A hospital expenses. But consumer taxes and premiums for other parts of Medicare—Part B for doctors and outpatient expenses, Part C for Medicare Advantage insurance, and Part D for prescription drugs—paid only about 28% of total costs. The other 72% was paid directly by taxpayers, and totaled nearly $250 billion in 2014, according to the 2015 Medicare Trustees’ report.
Calculator: I'm retired, how long will my savings last?
- Medicare premiums will likely rise further for higher-income beneficiaries. Most people pay a Medicare Part B premium of about $105 a month. But taxpayers with modified adjusted gross incomes of more than $85,000 ($170,000 for joint filers) already pay up to $390 a month for Part B and $73 a month in additional fees for Part D. The wealthiest Medicare beneficiaries thus already pay 80% of their expected Part B expenses, and some reformers see no reason why the federal government should cover the remaining 20%. If that subsidy is cut, Medicare will become catastrophic insurance protection for upper-income Americans; for routine health care, they will pretty much pay their own way.
- Low- and middle-income users of Medicare and Medicaid will face increasingly restrictive health care choices, with narrower networks of lower-cost doctors and hospitals. Care will be more tightly monitored and controlled to minimize future expenses. The reduction in freedom of choice will not be popular.
- The movement away from fee-for-service Medicare to fee-for-value care will accelerate. Doctors, hospitals, and other health care providers increasingly will be paid based on outcomes, not tests. This will save money by reducing unnecessary procedures and—another piece of good news—could improve the quality of care.
- Medicare is also moving toward paying groups of providers for what’s called “bundled” care. For example, a large test of knee and hip replacements is underway that pays a fixed fee for the total cost of the procedure and follow-up patient care to all providers. This approach, if expanded, would lead to standardized care packages that, again, could save money at the expense of patient choice.
Given these unappealing options, perhaps the failure of the presidential candidates to grapple with retirement issues is only to be expected.
Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” A revised edition explaining the new Social Security rules will be published May 3. His companion book, “Get What’s Yours for Medicare: Maximize Your Coverage; Minimize Your Costs,” will be published in October. Reach him at email@example.com or @PhilMoeller on Twitter.