Saturday, 25 Mar 2023

What Biden’s not saying about Social Security and Medicare

President Biden has scored a clear political win in his argument with Republicans about Social Security and Medicare. Some Republicans want to trim these safety-net programs for seniors, which are a large portion of federal spending and growing larger. Biden skewered those budget hawks during his February 8 State of the Union speech and has continued to throw Republicans off-balance by portraying them as heartless toward seniors.

It's shrewd politics. Social Security and Medicare are among the most cherished government programs, and Biden is likely to win points with seniors by aggressively defending them. But Biden is glossing over a giant looming problem with both programs, which is that they’re unsustainably expensive and the single-largest financial problem the US government faces.

What Biden will never say is that Republicans have a point. Various Republican proposals to cut Social Security and Medicare benefits largely seek to stop the two programs from devouring an ever-growing amount of federal tax revenue. Some are not so much programs as off-the-cuff remarks Republicans have made pointing out that the benefit programs for seniors are heading toward insolvency. A group of about 150 House Republicans has suggested raising the eligibility age for both programs to help keep them funded.

The financial vulnerability of Social Security and Medicare is not an ideological matter. It’s economic reality. Both programs are funded by dedicated taxes that will soon generate less revenue than the programs require. Government analysts think Medicare could begin to run short of money by 2028. Social Security could run short by 2034. The programs won’t die if the money runs short. But if nothing changes, there will only be enough money to cover about 80% of current benefits and that will decline over time.

The real disagreement between Democrats and Republicans is how to shore up both programs so they don’t run out of money. Biden, the man with many plans, wants to raise taxes on incomes above $400,000. Republicans oppose just about any new taxes, so their approach generally starts with reining in eligibility and trimming benefits. It’s popular to demand that the wealthy finance benefit programs for ordinary people, as Biden does. But there’s also a solid argument for reducing the spending of both programs before they devour the federal budget.

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Medicare and Social Security have grown from 19% of federal spending in 1970 to 27% today, with the Congressional Budget Office forecasting that they’ll account for 40% in 2052. They’re growing ad infinitum because of an aging population requiring more expensive health care as Americans live longer. And these are programs that pay whatever the beneficiaries are due, with no regular appropriation from Congress, like most other programs. They’re basically on autopilot.

Should the United States forever devote a growing portion of federal revenue to older generations? Maybe not. Social Security and Medicare date back decades, to a time when few foresaw the portion of federal revenue they’d gobble up. Almost nobody would design a program from scratch that got unsustainably expensive over time.

“The growth of Social Security and Medicare should be slowed,” argues Andrew Biggs of the American Enterprise Institute. “Government has important jobs other than taking money from young people and giving it to old people. Americans want a national defense; roads and bridges and airports; better health coverage; security against terrorism; schools and college tuition; and countless other things that the federal government does.”

Raising taxes obviously brings in more revenue, so in theory you could keep retirement programs going with the higher taxes Biden wants. But there’s an optimal level of taxation that maximizes economic growth, which is best for everyone. More taxation is not always better. And the most effective way to fix unsustainable programs is usually a mix of tax increase and benefit reductions.

There are many sensible ideas for trimming Social Security and Medicare to help keep the programs solvent, without wrecking benefits for those who need them most. For Social Security, the eligibility age has been raised before and could be raised again, as Americans live longer and healthier. It could also be indexed to longevity, so it rises automatically with life expectancy and Congress doesn’t have to make politically difficult decisions. Benefits could be capped or even eliminated for wealthy retirees. A more extreme measure would be reducing benefits for everybody in accordance with the program’s funding.

Medicare is different, since unsubsidized health care can be ruinously expensive and competent care is obviously a life-or-death matter. But changes are still possible. Reform advocates recommend new ways for Medicare to lower payments to providers and other costs. Adopting some private-sector practices could make Medicare more efficient. Broader reforms might include new pathways for future doctors and other providers to enter the profession without taking on gargantuan amounts of debt that then require high salaries to pay off what they owe.

Biden isn’t talking about any of this. He’s only promising to protect Social Security and Medicare as they are. He’s also not debunking the myth that Americans are only getting back what they put into the two programs, through the payroll taxes everybody pays up to a certain percentage of income.

Social Security and Medicare tax revenue does not go into a bank where it’s held until needed by each individual payer. Instead, this money is an outright transfer from current workers to retirees. That’s actually a good deal for retirees, since on average a typical couple gets about 90% more from the system than they paid in, adjusted for inflation. On the current trajectory, that “bonus” is due to rise. Anybody advocating for a 1-to-1 payback on money paid in is actually calling for a huge cut in benefits.

Congress will have to grapple with Social Security and Medicare shortfalls eventually. Once the programs run short of money, the government might still be able to stall by borrowing to make up the difference or simply funding the shortfall from general revenue. But sooner or later, the funding gap will grow too large to ignore. Biden may be betting it won’t happen on his watch, and he may be right. But some future president is going to have to start telling the truth about Social Security and Medicare.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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