Social Security, Medicare still face significant funding gaps

James Capretta revisits the federal government’s primary funding challenge.

During the raucous debate surrounding the GOP-sponsored reconciliation bill, the trustees for Social Security and Medicare rather quietly released their annual reports on the status of the programs’ respective trust funds. Their projections once again show that it will not be easy to stabilize the fiscal outlook without closing the widening gap between how much is spent on these entitlement programs compared to the dedicated taxes and premiums collected to pay for them.

The core problem is a transformative demographic shift that was not anticipated when the programs were established. In 1935, when Congress approved the original Social Security law, and again in 1965, when Medicare was created, the expectation was that birth rates would remain close to their historical levels. That proved to be a costly misjudgment as family sizes began to fall sharply starting in the early 1960s and then continued to decline in the succeeding decades.

Further, while there was an expectation of improvement in average lifespans, the progress has been more rapid than anticipated.

Finally, with Medicare and Medicaid providing insurance coverage starting in the 1960s, demand for services rose precipitously, as did the prices charged by hospitals and doctors. With few exceptions, annual spending on health care has been rising more rapidly than incomes for most of the last half-century.

The combination of fewer workers, longer lives for retirees, and high inflation in the health sector has placed immense stress on the Social Security and Medicare Hospital Insurance (HI) trust funds, which are financed on a pay-as-you-go basis. …

… When Social Security and Medicare were enacted, Congress created trust funds to ensure program spending was largely paid for from dedicated payroll taxes and Medicare premiums. An exception was made for Medicare’s Supplementary Medical Insurance (SMI) trust fund, which was to be financed partly from beneficiary premiums and partly from an annual transfer from the general fund of the Treasury. The original split was 50-50. However, as costs soared in the program’s early years, beneficiary premiums were reduced relative to total costs and now cover only 25 percent of program spending. The gap between SMI premiums and expenditures, along with the expected shortfalls in Social Security and Medicare HI, are the primary sources of today’s deteriorating fiscal outlook.

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