A Swiftly Doubling Budget, Part 2
Paths to Sustainability for Medicare and Social Security
Social Security and Medicare, arguably America’s two most important—and most popular—programs to support the elderly, are not fiscally sustainable. Expenditures are outpacing revenues, forcing future services cuts or borrowing. Both programs receive revenues primarily through payroll taxes. However, simply raising payroll taxes to cover the existing expenses seems unlikely to have sufficient support to pass in Congress. Reducing expenditures will require some restructuring of the programs.
Social Security. Americans are poor savers for retirement. To remedy this, since 1935, the federal government has collected payroll taxes on the first $176,000 in annual income to support payments primarily to elderly Americans who have paid into the system - Social Security. These monthly benefits currently range from roughly $52 to $5,200, depending on how much and how long a pensioner worked. However, the trust fund that provides these benefits is scheduled to run out of money in 2035, leading to an automatic 17% reduction in benefits. While attempts to blame one party or another abound, the reality is that it stems largely from demographics - people used to have more children, resulting in more young people paying into the system.
While the crises has been forecast for a long time, Congress has not taken action to fix it, and now the options are worse and less effective. For instance, keying initial benefits to the cost of living (consumer price index: CPI), instead of average wage growth, would have completely eliminated the underfunding problem…but only if we had enacted it 15 years ago. Realistic solutions now will require both reductions in program spending and increased revenues. Raising the retirement age polls very poorly, so the most likely solutions for reductions in spending include both lowering the initial benefit for high-earners and limiting the growth of spending to a combination of average wage increases and CPI. Similarly, raising the payroll tax rate will likely receive little support, making the more probable revenue source the elimination or substantial increase in the payroll tax wage cap.
The longer we wait, the harder the problem is to solve. If there is a silver lining to Trump’s tariff chaos, it may be that it pushed people to save more, rather than spend more, easing the impact of any reduction in benefits, although this is cold consolation to those with little to save. Oregon and some other states have also created automatic retirement savings programs that supplement Social Security and that could also cushion the blow. Despite Social Security’s popularity and the costs of delay, there seems little political energy to solve the problem in the immediate future.
Medicare. America’s primary health insurance for the elderly, Medicare, faces insolvency in 2026, soon after Social Security goes broke. This would result in an 11% underfunding of the hospital trust fund (Part A). Parts B (outpatient care) and D (prescription drugs) also show unsustainable cost growth. Parts B and D are also more reliant on general funds than payroll taxes or premiums.
While demographics play a role in causing the problem, Congress also worsened it by failing to exercise discipline in the Medicare Advantage (MA) program. MA was originally designed to save money by allowing private insurers to manage care and payments, but Congress consistently failed to rein in abuses of the MA program by insurers and other cost drivers, resulting in excess costs of an estimated $84 billion in 2025. Total excess spending over the 10 years is estimated at $1-1.4 trillion.
Given that about half of Medicare beneficiaries are enrolled in MA plans, eliminating the program completely could be unwise, even though doing so would do much restore solvency to the system. Instead, Congress is likely to restrain the program to a “cost plus” index - capping payments to MA insurers at a lower percentage of the costs of a non-MA beneficiary. Congress could also increase the payroll tax by 0.35% to restore solvency, although this seems less likely. Capping MA programs will be significantly disruptive, as MA plans have aggressively recruited in ways that they will not be able to sustain with lower compensation. This may result in them leaving the market or limiting enrollment, effectively forcing beneficiaries back to standard Medicare. While this has the same effect of simply terminating the program, Congress could avoid much of the political blowback by blaming the insurers.
Conclusion. Medicare and Social Security’s popularity with Americans has yet to force Congress to do the hard work of shoring the programs up. As their insolvency dates approach, the options for sustaining the programs without deficits become more difficult to address. Unfortunately, Congress seems unlikely to address these challenges before the last minute, increasing the need for both service cuts and tax increases.
Other News.
A Big, Beautiful Compromise? Lost in the scrum over the President’s maximalist assertions of his power is the opportunity for real dialogue over the future of our federal budget. In a Congress with room for discussion, we might end up with a more modest set of tax cuts that are focused on lower-income people, a Medicaid work requirement with easier compliance, confirmation of some of the President’s tariffs to raise revenue over time, and an overall reduction in the federal deficit. All of these are popular with voters to some degree, at least in comparison with alternatives like raising other taxes. However, for the time being it continues to be “my way or the highway” in DC.
A Grim UO Budget. Declining enrollment of out-of-state and international students is posing a serious threat to UO’s finances. The Frohnmeyer Model of subsidizing in-state tuition and offsetting declining state support with these students had a good run - 30+ years - but it is hard to see how it can continue much into the future. It’s long past time to take a long, hard look at a sustainable future for UO and Oregon’s other 4-year colleges and universities. Possibly the state government could pay more, but it is unlikely to do so without an increased focus on in-state students.
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The views expressed herein are those of the author and not necessarily those of the Department of Navy, the Department of Defense, the University of Oregon, or any other entity with which the author is affiliated.
You refer to “raising the payroll tax” as a means to improve Social Security sustainability, but fail to address the underlying problems: the cap on payroll deductions. I see no principled rationale to oppose simply eliminating the cap, although raising it to a new arbitrary level would be sufficient. SCRAP THE CAP!