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Cutting Social Security & Medicare

Updated: Mar 1

By - Tim Rosado

The public policy debate over the future of Social Security and Medicare has heated up, with President Biden successfully putting Republicans on defense on this issue and Democrats preparing to try and use past-recent Republican proposals against them for the next elections cycle.

Putting the recent politicking aside, which is likely to increase in intensity in the coming months, what are the basic specifics about what is actually being proposed to "cut" the programs?

Overarching Fundamental Truths

Before summarizing what is currently being proposed, here are what I consider to be some fundamental truths about the issue of cutting Social Security and Medicare:

  • Actions to reduce spending, or reduce expected future spending increases, in Social Security and Medicare, does not necessarily mean the programs will be destroyed or will have a detrimental effect on most beneficiaries. The scale and scope of any specific proposals matter.

  • Advocating for significant programs important to a large portion of the US population to be scaled back because of budgetary concerns in isolation from options to raise new revenue for program needs, is fundamentally dishonest.

  • Taking actions to preserve the long-term fiscal health of the Federal budget, and by extension important programs like Social Security and Medicare, must begin soon. The annual budget deficit is already large and could more than double as a percent of the economy over the next decade. Social Security and Medicare cannot be left out of discussions to improve our national fiscal health. Social Security alone constitutes 21% of all Federal spending, and all Federal healthcare programs (to include Medicare) collectively constitute another 25%.

  • Advancing measures to significantly alter the program approach of Social Security and Medicare is different from actions to improve their financial health. For example, advancing a program to permit Americans to move payroll taxes intended for the Social Security system alternatively to company stocks and bonds, is not about saving Social Security. For better or worse, it constitutes a replacement of Social Security.

Key Proposals

The Hill reported (March 1) that a bipartisan group of Senators is working to put together a set of bipartisan proposals to reform Social Security (likely not Medicare). The membership of that group is not known publicly, but it likely includes at least Tim Kaine (D-VA), John Cornyn (R-TX), Angus King (I-MA), Bill Cassidy (R-LA), and Mitt Romney (R-UT).

While it is not clear at this time that a set of written proposals will be put forward by the group, there are already a number of significant proposed options to help control Social Security and Medicare costs going forward. Among them:

  • Increase the Social Security retirement age by three months per year until the minimum retirement age grows by a total of three years (by 2040), and then link the eligibility age to life expectancy. Current retirees would not be affected. This was proposed by the House Republican Study Committee (RSC) in its 2022 "Blueprint to Save America" (pg. 82). A similar proposal has been made in the past by the Congressional Budget Office (CBO).

  • Align Medicare eligibility age with the Social Security retirement age. As the eligibility age for Social Security goes up, Medicare eligibility would be pegged to those ages. The was also proposed in the House RSC Blueprint (pg. 69). The general Medicare eligibility age (65) has not changed since the program was established in 1965.

  • Increase Medicare premium costs on high-income earners. Proposed in the House RSC Blueprint (pg. 71).

  • Increase the amount of income of certain high-income Americans that is subject to payroll taxes that finance Social Security (therefore increasing funding for the program). Social Security payroll taxes would be assessed on income above the current $160K threshold. Then candidate-for-president Joe Biden proposed in 2020 to assess such taxes on pay above $400K. The CBO proposes a lower threshold, with an option that such taxes be assessed above $250K.

  • Reduce Social Security benefits for high-income earners. CBO proposes as an option to change benefit formula calculations that would have the effect of reducing, for future beneficiaries, benefit levels for more persons with relatively higher lifetime earnings.

  • Change the calculation method of cost-of-living (COLA) increase adjustments for Social Security. CBO has proposed an option of changing the methodology used for calculating COLAs in a way that would have the practical effect of smaller annual COLAs in the future.

  • Sunset all federal laws every five years, including Social Security and Medicare, and force Congress to issue a report "every year telling the public what they plan to do when Social Security and Medicare go bankrupt." This proposal is likely thought of as a way to suggest Republicans will be better at controlling Social Security and Medicare spending, without having to propose any specific spending reforms that could be scrutinized by voters. This idea was put forward by Senator Rick Scott (R-FL) earlier in 2022 in his "11-Point Plan to Rescue America." Because of recent blow-back on this proposal, Senator Scott recently proposed follow-on legislation requiring a two-thirds vote in the Congress to permit cuts to Social Security and Medicare.

  • Privatization measures. The House RSC Blueprint proposes to "increase competition" in the Medicare program by expanding the use of Medicare Advantage plans with Federal subsidies directed towards their use. The House RSC Blueprint (pg. 82) also "urges lawmakers to consider legislative options” to permit workers and employers, in order to reduce payroll tax liability, to permit investments into other retirement plans instead of Social Security. The bipartisan group of Senators discussing options for Social Security are reportedly assessing the concept of establishing a "sovereign wealth fund" to finance the program, which would invest Federal resources in both private and public outlets but at the same time ensure a minimum level of return to the program via the backing of the Federal Government and its resources. A key concern with privatization approaches has been the concern with market-based financial losses from private investment affecting benefit levels.

Will Anything Happen?

Nothing is likely to happen, for now. While there may be some grand bargain between Republicans and Democrats on the Federal budget to address the deficit and accumulated Federal debt, there is seemingly no scenario at this point where Social Security and Medicare will be in the discussion. Democrats have made it clear that they will make proposed spending reductions on the programs a campaign issue for the next elections cycle, which undermines even reasonable proposals of change. In the past, what has worked to enact reform in Social Security and Medicare is when the White House and Congressional leadership get together and compromise on both spending and revenue, permitting both sides to claim victory and accomplish something. Current leaders have so far not expressed any willingness to compromise on any budget and tax measures, much less those impacting Social Security and Medicare.

This means nothing gets done at least until after the next Presidential election two years from now. After that election, legislative success may depend largely on whether or not there is a significant majority in Congress on one side or the other that would make significant compromise unnecessary.


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