The trust funds supporting Social Security and Medicare have taken a double hit from the pandemic. While a gridlocked Congress has looked the other way for years as program finances deteriorated, the damage has reached the point that the new Congress elected this November cannot continue to kick this can down the road.
There is little doubt that Democrat control of the White House and Congress would lead to expanded federal spending on both programs as well as rejuvenation of the Affordable Care Act. I know that enormous federal budget deficits don’t seem to matter much these days. Still, I’d feel better if some adults in the room figured out how we’re going to pay for such expansions.
Republicans have opposed such spending but their attitudes could change if Joe Biden becomes president. Continued gridlock likely would produce only band-aid fixes, along with near-constant fights risking government shutdowns.
The biggest hit from COVID-19 to date is that it has reduced payroll taxes paid into the Social Security and Medicare trust funds. At the same time, Medicare expenses have risen sharply due to coronavirus treatment and testing.
It’s also likely that some older Americans facing income reductions have decided to file earlier for Social Security than they had planned. This will raise short-term spending by the program. Because earlier claiming dates entitle people to lower benefits than if they waited, however, the program’s longer-term prospects shouldn’t be adversely affected.
The primary Social Security fund that pays retirement benefits was projected to have enough money to pay all claims until 2034, after which incoming payroll taxes from current workers would pay only 76 percent of the benefits earned by retirees. A smaller fund that covers disability payments was projected to face no benefits shortfall until 2065.
The Medicare trust fund covers Part A of the program, which pays for hospital care. It has been in precarious shape for a long time and was projected to run short of funds in 2026, after which its income would cover only 90 percent of projected expenses.
Part B of Medicare covers doctors, outpatient, and equipment expenses. Part D covers prescription drug costs. These parts of Medicare have no trust funds and depend on Congress to fund ever-widening annual deficits. In calendar year 2019, the combined deficit for both parts of Medicare was nearly $340 billion, By 2029, the trustees projected, this deficit will more than double to nearly $717 billion.
To emphasize, this was all before the pandemic. It’s not clear how severe the financial hit will end up being. But it ranges from poor to worse. The Congressional Budget Office recently updated its look at the trust funds. Since just the beginning of the year, it said, the cumulative deficits of all federal trust funds (which also include military retirement and unemployment) over the 2021-2030 period rose by $130 billion, or 6 percent, to more than $2.3 trillion. The ultimate hit, as we know, will wind up being larger.
The amount of outstanding federal debt has just exceeded the total size of U.S. annual economic output – a level not reached since World War II. Unless the economy gets back into some kind of new normal, this ratio has not finished rising.
Again, I know deficits “don’t matter” these days. The Federal Reserve has made it very clear it will create enough new digital U.S. dollars over the next several years to fund our deficits and permit interest rates to remain at near-zero levels. But Fed leaders come and go, and so do prevailing notions of what’s best for the country.