The best way to think about social security and medicare is to imagine a family that is spending more than they earn and has done so for several years. Eventually, they run out of savings and have to cut back on their spending. Currently, it is estimated that Medicare Part A trust fund will be exhausted by 2026, and Social Security fund will be exhausted by 2034. This does not mean that there will be no funds available, because in some respects theses are pay as you go programs. For example starting in 2026, if nothing else changes, Medicare Part A still pay 91 percent of costs, although this will decline to 78 percent by 2042.
Benefits to social security recipients will begin to decline starting in 2035 if nothing is changed, but again, the initial decline will be small and accelerate over time.
To Fix the Problem Embrace the Bleakness
The above facts are well known to policymakers, but their inability to make even marginal changes only mean that when the bills come due the pain will be even greater. It's a bit like a toothache that you hope will get better by itself, it won't and putting off a visit to the dentist will only make it worse. The following are prescriptions that will address this problem in ascending order of quality. These are not earth shattering ideas, but reflect reality.
4) Cut benefits: This is do nothing option. The problem with this option is that Americans are poor savers and are overly dependent on social security for their retirement. This policy will lead to a reduction in living standards for seniors and a lower quality of health care. Also, hospitals in areas with a disproportionate number of elderly will face lower revenues, and will either cut back on services or close altogether.
3) Increase Taxes: Currently the medicare payroll tax is 1.45 percent paid by employers and employees. If this were raised to 1.9 percent, the problem would be solved. Higher social security payroll taxes would also make social security financially viable. The problem with this policy is that payroll taxes are a tax on employment. The more people hired the greater the taxes paid by the employer. This policy will further accelerate the substitution of labor with machinery and technology. It could lead to higher unemployment, especially among those with a limited skill set. While other taxes could be raised to pay for these programs, the benefit of using payroll taxes is that is taxes a broad base and is used for a specific purpose.
2) Raise the ages for enrollment in Social Security and Medicare: Contrary to popular belief, the U.S was comparatively late in offering social security. The first country to enact a modern social security system was Germany in the late 19th Century. Initially the age for benefits was set at 70, but was reduced to 65 during WW I. When the U.S. enacted social security in 1935, it kept the age at 65. It's important to note that in 1935 the average lifespan in the U.S. was 61. In other words most Americans would not have expected to see any social security benefits.
One of the greatest success stories of the 20th Century has been the consistent rise in expected lifespans. Today the expected lifespan is almost 79 which means that the typical person can expect to receive social security benefits for approximately 14 years. It should also be noted that for most of us the nature of work has gotten easier. Office jobs have replaced farm and factory work, meaning that most of us can work longer. This should be considered good news and as a result, the age limit should be adjusted.
Time for an Update
1) Allow more immigration: The fundamental issue facing Medicare and social security is demographic. There are not enough workers to support the retired. Currently there are 62 million people collecting social security, and there are only 128.6 million people working full-time with other 27.2 million working part-time. In other words there are about 2.3 people supporting one social security beneficiary. This number is only going to get worse over time, and will begin to get much worse after 2050. The birthrate in 2015 was 12.4, half of what it was in 1959, and lower than during the Great Depression. Conversely, people from around the world still want to come to the U.S. These people tend to be young, and often have skills employers need. There is even a strong demand for workers with what some consider limited skills. Increasing immigration would pay a demographic dividend that would last decades.
There is some concern about an impending economic slowdown. Part of this concern is due to the lack of workers. Housing construction would be up if there was more immigration and the demand for goods and services would be higher if immigration was easier. In fact if enough immigrants came none of the other policies outlined above would be necessary.
A Note About Medicare for All
There is a great deal of support among the democrats running for President for a single payer health care system along the lines of "Medicare for All". Given the fact that few of these candidates have explicitly stated how they are going to pay for the current Medicare system makes Medicare for all a slogan and not a serious policy. If you are unable to fully pay for Medicare for 60 million people, how are you going to cover 300 million?
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