The economic fallout of COVID-19 is accelerating Medicare and Social Security’s slide into insolvency, according to a new Financial Times piece by Free the Facts’s Policy Advisory Board Chairman Dr. Lanhee Chen.
In May, the trustees’ annual report had projected that Social Security would reach insolvency by 2035 and Medicare by 2026, but, as Chen points out, independent experts say those estimates have been overtaken by events. With Covid-19 putting a new strain on both programs, the Penn Wharton Budget Model predicts the Social Security trust fund could run dry by 2032. The Bipartisan Policy Center puts the date at 2026. And as for Medicare, the Center for a Responsible Federal Budget says its Hospital Insurance Trust Fund will become insolvent as soon as 2024.
According to Chen, Social Security and Medicare are hurting on at least three fronts. First, now that unemployment is up, fewer people are paying the payroll taxes that fund them. Second, a growing number of beneficiaries now aren’t making enough to have their benefits taxed, further depriving the programs of revenue. And third, bonds held by the trust funds are generating less revenue because interest rates are currently low.
So what happens if the funds run dry?
Per law, Social Security benefits must be cut, in real time, by the percentage of the shortfall. That means if there’s a 25% shortfall, every recipient will get 25% less in their check each month.
Medicare, on the other hand, doesn’t have clear-cut guidelines for handling a deficit, but Chen argues Congress will face pressure to cut benefits, raise taxes, or do both.
To shore up the programs, Chen calls on Congress to include some smaller reforms in the next COVID-19 relief bill. He suggests pegging Social Security’s yearly cost-of-living adjustments (COLA) to a slower-growing measure of inflation. He also proposes a unified cost-sharing requirement for all services covered by Medicare.
Chen acknowledges that we need to do far more to save these programs in the long run, but, he writes, “Policymakers should not delay when it comes to taking an important first step.”
You can read all of Chen’s article here.