It's not broke, so don't fix it

There's an easy fix for Social Security, while the Medicare trust fund is an anachronism

Even when there’s good news, nothing is more frustrating than seeing the press misrepresent the financial status of the two most important programs that support senior citizens. “Go-broke dates pushed back for Social Security, Medicare,” the Associated Press headlined its story last Friday.

Just in case you saw that and were worried, take heart. Neither program will “go broke” in 2035 (Social Security) or 2026 (Medicare), which is one and two years later, respectively, than projected a year ago by the programs’ trustees. Those are the dates when the surpluses accumulated over many decades (the programs’ trust funds) will finally be exhausted. Without further action by Congress, benefits will have to be cut by about 20% to make payroll tax collections precisely equal to the payments made to Social Security beneficiaries and hospitals participating in the Medicare program.

On Social Security, Congress has lots of options between now and its trust fund exhaustion date. It could cut benefits (Boo!). It could raise taxes (Yay if it’s on the 6% of wage earners who make more than $147,000, which is this year’s cap on the Social Security payroll tax.). It could do a combination of both. Or it could continue doing what it has done for decades, which is to wait and see what happens.

Let’s start with the easiest fix. If Congress wants to solve the program’s actuarial imbalance in one fell swoop, all it need do is eliminate the cap on income subjected to the current 12.4% payroll tax, which is paid half by workers and half by employers (and entirely by the self-employed).

Back in 1982, the last time Congress was under pressure from falling payroll tax receipts to legislate a fix for the program, 90% of total wage and salary income was subject to the payroll tax. By 2017, it had fallen to 84%. Why? The steady rise in income inequality over those decades meant more of the total national income pie was going to people earning more than the cap, and every dollar they earned beyond the cap was exempt from the payroll tax.

Defenders of the cap, which is indexed for inflation, argue that taxing all income would break the connection between income and benefits. That in turn would reduce peoples’ sense that they earned those benefits and thereby reduce political support for the program.

That ignores the fact that benefits are already skewed by income. The more you made during your working life, the more you get when you retire. Decreasing that skew slightly by making a benefit that is already progressive (Social Security sends lower-wage workers a higher share of their pre-retirement income than higher-wage workers) slightly more progressive won’t be noticed by the upper income cohort that will be subjected to higher payroll taxes.

The upper- and upper-middle class of this new Gilded Age already has considerable non-Social Security assets like 401(k)s, private savings, home equity and, for some, hefty corporate pensions. They pay less attention to Social Security (the maximum benefit for high-wage workers is $3,240 a month in 2022) than the third of the population that relies on its benefits for their entire retirement income, or the 60% for whom it is more than half.

Medicare’s anachronism

The more imminent demise of Medicare’s trust fund could also be fixed by raising taxes. But that begs the larger question: Why does it continue to exist at all?

Why do we continue to fund hospital payments, which is just a third of total health care expenses, with a relatively small payroll tax (2.9%, evenly split between workers and employers) while the rest of seniors’ health care is funded by general taxation and isn’t subjected to long-term trust fund accounting. In other words, physicians, drug companies, insurers selling Medicare Advantage plans, post-acute care and ambulatory surgical centers get theirs from the broad range of taxes that support the federal government.

This accounting dichotomy has only grown more absurd now that the Medicare Advantage plans, which are sold and run by private insurers, cover about half of all seniors. The rates MA plans pay hospitals can vary widely. The Medicare Payment Advisory Commission has repeatedly warned that encounter data private insurers provide to CMS (these are reports that show who winds up in hospitals and what those hospitals got paid) is inadequate. To the extent those records are incorrect or missing, it is impossible to accurately measure how much of the trust fund is being spent on hospitals by MA plans.

The easy solution for the Medicare trust fund “problem” is to simply abolish it. Keep the tax. Just put the money in the government’s general fund and let the general fund pay for all of Medicare – not just the two-thirds of payments it already covers.

This won’t solve the larger problem of rising health care costs. But hospitals are only one part of that problem. Any solution must also deal with rising insurance industry profits, especially from their MA plan offerings; skyrocketing drug industry prices and profits; and the perverse incentives for specialist overuse that are contained in Medicare’s fee-for-service physician payment schedule.

Spending political time and energy on fixing Medicare’s trust fund will only distract policymakers from dealing with these more serious issues.