Entitlement Chastenings

Job growth remains remarkably strong given the already tight state of the labor market.

Of all the millions of words written regarding Social Security and Medicare’s plight involving sure and pending financial failure, this from St. Augustine best reflects the reactions of the current and pasts Congresses:

Two facts transcend all others regarding these vital federal programs.

First, in their current forms these programs will fail financially in only a few years. In June, the programs’ respective Trustees provided us our annual reminder of this cold reality.

According to the Social Security Trustees’ Annual Report, the Social Security Trust Fund will be exhausted in 2034 if the economy and the program each perform as projected. Of particular note, this projection assumes no intervening recession and no tapping of Social Security to pay for other policies.

The Medicare Trustees’ Annual Report is arguably bleaker as it projects the Medicare Part A, or Hospital Insurance, Trust Fund to be exhausted even sooner, in 2026. Once 2026 comes around, incoming revenues will be enough to cover only 91% of program costs,

As if this weren’t threatening enough, Social Security and Medicare’s shortfalls remain indefinitely – leaving Social Security with a cumulative $13.2 trillion unfunded obligation and Medicare with a nearly $38 trillion unfunded obligation. Combined, these two figures are about two and half times the size of the U.S. economy today.

The second transcendent fact is that Social Security and Medicare will be reformed, either prior to the exhaustion of the trust funds or after, and the reforms may be intentional or by default. But this much is certain: Social Security and Medicare will not operate in the future as they have in the past.

While often unrecognized, Congress long ago put in place an effective default reform for Social Security and a substantial partial reform for Medicare. These defaults execute automatically if Congress fails to provide an alternative.

The exhaustion of Social Security’s Trust Fund means the program’s still substantial resources are nevertheless inadequate to pay the promised benefits from the exhaustion date forward. Under the default reform, benefit checks would be cut by about 23% initially. The average monthly benefit in June 2018 was $1,297, so the average reduction today would be about $300 a month or $3,600 a year. Alternatively, Social Security may pay full benefits as funds become available, meaning checks will arrive later, and later, and later.

The default and partial reform of Medicare follows similar lines. Medicare Part A will still have substantial revenues once the Trust Fund is exhausted, but will face bills presented by Medicare health care providers exceeding what the program can pay. So, as with Social Security, either the amounts paid providers will be cut below those agreed to, or bills will be paid as resources become available, meaning later, and later, and later.

One wrinkle with Medicare is that approved health care providers are contractually owed the amounts due. Moreover, it would seem unlikely affected providers would continue to provide services as contracted if the federal government were consistently shorting or delaying payments.

Are America’s seniors likely to stand quietly by as their benefit checks are cut? Probably not.

Are America’s health care providers likely to stand by as the federal government shortchanges payments? Probably not.

All of which means the default option will not be the final answer. Congress will be forced to fix the financing of these two programs. They can delay a while longer, following St. Augustine’s tongue-in-cheek plea, and ensure the required reforms are more drastic and more frightening to America’s seniors. This appears to be the preferred course of the key lobby organization for seniors.

Or Congress and the president can realize the virtue of enacting reforms before the most-predicted crisis in modern history actually breaks. If history is any guide, and it usually is, the smart money is on the stupid solution – the default solution. We will have nobody to blame but ourselves.

About the authors

J.D. Foster

Dr. J.D. Foster is the former senior vice president, Economic Policy Division, and former chief economist at the U.S. Chamber of Commerce. He explores and explains developments in the U.S. and global economies.