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Stronger economy improves outlook for Medicare, Social Security

Benefits projected to last longer before running dry in the 2030s

Martin O’Malley, commissioner of the Social Security Administration, called on Congress to take action sooner than later to shore up the Social Security trust fund.
Martin O’Malley, commissioner of the Social Security Administration, called on Congress to take action sooner than later to shore up the Social Security trust fund. (Tom Williams/CQ Roll Call file photo)

Stronger-than-expected economic growth last year drove improvements to the fiscal health of the trust funds that finance Medicare and Social Security, according to annual reports released Monday by the programs’ trustees. 

The hospital insurance trust fund, which pays for Medicare Part A benefits, will be able to pay 100 percent of total scheduled benefits until 2036, five years later than was reported by the trustees last year. Meanwhile, the outlook for Social Security improved slightly over last year’s projections by one metric and remained unchanged under another. 

If combined with the program’s disability insurance trust fund, the old-age and survivors insurance trust fund could pay out the full retirement benefit until 2035, a year later than last year’s projection. At that point, Social Security benefits would face a 17 percent cut.

The results nonetheless represent “good news,” the program’s top official said Monday.

“Any potential benefit reduction event has been pushed off from 2034 to 2035. More people are contributing to Social Security, thanks to strong economic policies that have yielded impressive wage growth, historic job creation, and a steady, low unemployment rate,” Social Security Commissioner Martin O’Malley said in a statement. “So long as Americans across our country continue to work, Social Security can — and will — continue to pay benefits.”

Combining the two funds would require congressional action. Absent that or other changes to shore up Social Security’s finances, the retirement benefit would face a 21 percent cut in 2033, as the old-age and survivors insurance trust fund becomes depleted — the same date projected in last year’s report. 

Still, even that metric showed a bit of improvement from last year. An administration official who briefed reporters Monday said the date of the retiree benefit fund’s exhaustion is pushed back by seven months in the latest forecast, even if still in 2033.

The Social Security trustees report is here, and the Medicare trustees report is here. A fact sheet from the Treasury Department on both programs is here.

Social Security

O’Malley and the other trustees urged Congress to take action to shore up the trust fund’s finances. Acting sooner would allow Congress to make smaller changes to payroll taxes, benefits or both, than if lawmakers wait. But while many agree lawmakers should address the coming shortfall, there’s little consensus on a solution. 

“Congress can and should take action to extend the financial health of the trust fund into the foreseeable future, just as it did in the past on a bipartisan basis,” O’Malley said. “Eliminating the shortfall will bring peace of mind to Social Security’s 70 million-plus beneficiaries, the 180 million workers and their families who contribute to Social Security, and the entire nation.”

Since 2008, the cost of the retirement benefit has grown much faster than taxable payroll. That dynamic is projected to continue through about 2040, as baby boomers leave the workforce faster than younger, smaller generations can replace them. The total cost of Social Security exceeded the program’s total income starting in 2021, and is projected to do so going forward, according to the report. 

The longer Congress waits to address the issue, the more drastic an intervention will likely need to be to keep the program afloat. 

To keep the combined Social Security and disability trust funds solvent for the next 75 years, if lawmakers acted this year they would need to increase payroll taxes by 3.33 percentage points to 15.73 percent, cut benefits by 20.8 percent or some combination of the two, according to the report. Currently, only the first $168,600 of an employee’s wages are subject to Social Security tax. 

If lawmakers wait until 2035 to address the problem, payroll taxes would have to increase by 4.02 percentage points or retirement benefits would have to be cut by 24.6 percent to keep the trust funds solvent. 

The Biden campaign at one point backed a proposal to levy the Social Security payroll tax on individuals earning above $400,000 while shoring up benefits for lower-income and longer-living retirees, but the administration ultimately decided not to put it in the president’s budget plans.

Still, a version of it has some support from top Democrats on Capitol Hill, led by House Ways and Means Social Security Subcommittee ranking member John B. Larson of Connecticut.

On the GOP side, the conservative House Republican Study Committee has proposed changes that would rein in benefits for upper-income beneficiaries and push back the retirement age from 67 under current law.

Neither set of proposals has bipartisan support.

Medicare

While the health of the Medicare hospital insurance trust fund — which pays for stays in hospitals, nursing homes and hospice, as well as some other services — has slightly improved, it continues to face “significant financing issues,” the trustees wrote in the report. 

It will only be able to pay 89 percent scheduled benefits beginning in 2036, five years later than was reported by the trustees last year. 

The improvement in the Part A trust fund is caused by several factors, the trustees said, including higher payroll tax income from the stronger-than-expected economy and a policy change correcting the way medical education expenses are accounted for in Medicare Advantage rates. Actual 2023 Part A expenditures were also lower than was projected last year. 

But increasing health care costs continue to threaten the program. Medicare costs in 2023 amounted to 3.8 percent of GDP and are projected to increase to 5.8 percent in 2048. 

Growth in trust fund expenditures has averaged 5.5 percent annually over the last five years and is projected to be 5.8 percent annually over the next five years. 

“Current law projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation,” the trustees wrote.  “Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers and taxpayers.”

While there has been debate in Congress about reducing Medicare spending, the issue has been controversial. Bipartisan legislation that would require Medicare pay hospitals the same rate for drug administration services as physicians offices has passed the House but has not been considered by the Senate. 

That legislation would save $4 billion over a decade by essentially cutting payments to hospitals, which are paid more than physicians offices that provide the same services. 

Lawmakers like Rep. Cathy McMorris Rodgers, R-Wash., chair of the House Energy and Commerce Committee, hoped to expand that policy to other services over the years to save more funding. But it faced fierce pushback from hospitals, which will likely continue to be an obstacle to saving Medicare money if it means payment cuts for providers. 

The Biden administration has proposed raising payroll, self-employment and investment taxes on upper-income households to finance what it believes would be an “indefinite” postponement of any Part A benefit cuts. But those proposals don’t have any support from GOP lawmakers.

As in the past, the trustees said the supplementary medical insurance trust fund, which finances physician services through Part B and outpatient drugs through Part D, is adequately financed into the indefinite future because it is primarily funded by premiums and government contributions. But “rapidly rising” costs have been placing “steadily increasing demands on beneficiaries and general taxpayers.” 

The monthly Part B premium for 2024 is $175. Part B and Part D costs have average annual growth rates of 8.3 percent and 6.6 percent, according to the report. The trustees project that the cost growth over the next five years will be 8.8 percent for Part B and 8.2 percent for Part D. 

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