The trustees of the Social Security- and Medicare-related trust funds released (June 2nd) the annual report on the condition of the funds. While the condition of Federal trust funds cannot be considered in the same way as say, a private trust, the financial outlook of Federal trust funds is an indicator of program conditions.
Program conditions, particularly with respect to financial viability of current laws that drive cost and revenue, are important given the dependency of Social Security and Medicare on the well being of millions of Americans today, and in the future (please see a good summary of basic facts about the benefit of Social Security from the Center on Budget and Policy Priorities.)
Key Trustee Report Takeaways
The cost of Social Security and Medicare will grow faster than the pace of economic growth (i.e., GDP) through the mid-2030s because of the growing share of the aging U.S. population, with Medicare growth outpacing economic growth through the late-2070s.
The accounting condition (i.e. the amount of time reserves will cover program costs) of the funds have improved by one year for traditional Social Security (i.e., Old Age Survivors Insurance), and two years for the primary Medicare program (i.e, Hospital Insurance/Medicare Part A). The condition of the disability portion of Social Security has improved to an extent that from an accounting standpoint, reserves will not be depleted over the course of the report’s 75-year projections.
While good news, a counter to the positive is that during 2021 all income for Social Security and Medicare (i.e, payroll taxes, taxes on benefits, trust fund interest) was less in total than the cost of the programs. This is particularly important because trust fund ‘reserves’ are being drawn down going forward.
But the reserves exist only in the accounting of the trust funds; they are not reserves in the traditional sense, sitting in a bank account or in investments waiting to be utilized. The financing of the extra costs will come from borrowing because the Federal budget currently operates in a deficit where it borrows to pay for a portion of current budget costs. That borrowing is effectively paid for by future taxpayers (not unlike past Federal borrowing for other things that are being paid for by today’s taxpayers.)
Ultimately, however, there is nothing significantly new in the trustee report. We have known for some time that Social Security and Medicare costs would begin to exceed revenue around now, and that accounting reserves would be spent down to pay for rising costs. The important issue is, and always has been, if the projections will drive policy necessary actions to ensure the programs are financially sound for the long term.
Outlook
There are currently no significant planned legislative actions on the near-term horizon (i.e, in the current 117th Congress, or by the Biden Administration) to directly address the long-term financial stability of the Social Security and Medicare programs. There may potentially be action to proactively address the annual Federal budget deficit, which could make it easier to borrow to finance critical programs. And, the Federal budget deficit is projected to fall significantly this year anyway, even without new proactive measures (though remain historically high as a percentage of the economy).
That all being the case, for the long term there is no substitute to legislative actions to reduce projected costs and/or raise additional revenue to finance the programs. Actions can be deferred only for so long if program costs grow, as expected, to levels that would force too much Federal borrowing and/or draw away inordinate annual tax revenue from other important budgetary priorities.
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