Is Fixing Social Security and Medicare as Dire as It Seems?

There must be 50 ways to fix Social Security.

OK, that’s not a direct quote of the Paul Simon lyric, but I find myself humming the tune every year when the Social Security trustees issue their annual report on the program’s health.

Like clockwork, you can expect to see misleading headlines warning that Social Security is going broke or running out of money. And you’ll see similar headlines about the report of the Medicare trustees.

This year, let’s consider the inaccurate news coverage in the context of an important milestone: the 50th anniversary of the Employment Retirement Income Security Act, or Erisa. This landmark federal legislation was signed into law in 1974. Erisa established badly needed fiduciary standards and regulations for private pension plans in the wake of a series of defined-benefit plan failures and abuses. But the law’s tougher standards did ultimately play a key role in the shift by employers to defined-contribution plans.

This shift from the guaranteed lifetime income provided by pensions to tax-deferred 401(k) plans has been described as the “great risk shift,” and it has played a big role in leaving so many retirees at risk of a falling standard of living in retirement.

The 401(k) system has performed well for higher-income workers, especially those employed by large companies with strong, low-cost plans. But it leaves roughly half of workers with no retirement savings plan option. Many who work at small companies are in mediocre to bad plans with high costs that take an enormous bite out of savings.

This year’s Erisa anniversary will spark plenty of conversations about ways to improve and expand access to defined-contribution benefits—and those conversations are worthwhile.

But I hope the anniversary, and the fall elections, will also infuse new energy into efforts to improve and expand Social Security and Medicare.

A Snapshot of Social Security and Medicare Finances

Social Security and Medicare both face long-term solvency challenges.

This year’s Social Security trustee report forecasts that the combined retirement and disability programs will be insolvent in 2035, which is one year later than last year’s forecast. To be clear, that doesn’t mean the program will have no money left to pay benefits. Rather, the forecast references the year when the enormous Social Security trust fund reserves (currently $2.78 trillion) would be depleted.

Still, without action by Congress, the program in 2035 would be bringing in enough cash to pay only 83% of the benefits promised to current and future beneficiaries. In other words, beneficiaries would be facing a disastrous 17% cut in benefits.

Because Medicare is funded through a variety of sources, its situation is less dire. This year, the trustees project that the Hospital Insurance Trust Fund, which finances Medicare Part A, will be exhausted in 2036 (five years later than in last year’s report). The other parts of Medicare cannot run out of funds, because general government revenue and premiums are adjusted annually to meet projected costs.

If the Hospital Insurance Trust Fund did become insolvent, it would have sufficient funding from current revenue to meet 89% of benefits.

How to Fix Social Security’s Finances

Polling consistently shows that most Americans prefer raising new revenue to support both Social Security and Medicare, and I’d agree.

Democrats typically advocate for raising taxes on the wealthy to extend Social Security’s solvency, while Republican lawmakers want to fix the problem by cutting benefits.

President Joe Biden’s latest budget plan calls for higher-income people to pay more.

Congressional Democrats have called for an increase to the cap on the amount of wages subject to the payroll tax, and some plans also call for new taxes on investment income. These various proposals would restore solvency anywhere from 32 to 75 years.

These plans also modestly expand benefits, particularly for the most vulnerable retirees:

• The Social Security Expansion Act would raise benefits across the board by roughly $200 per month and implement a more generous annual cost-of-living adjustment. It also would add targeted increases for very low-income workers.
• The Social Security 2100 Act would raise benefits modestly across the board and boost the COLA. It also would reduce the share of retirees whose benefits are subject to income taxes and boost benefits for widows.

Meanwhile, Donald Trump, the likely Republican presidential nominee, usually says he would not touch Social Security. But leaving the program untouched is not a policy solution, since it results in a 17% cut in benefits.

Republican solutions center on cutting benefits. They have proposed phasing in higher retirement ages—that is, the age at which you can receive…