Last week, the trustees for Medicare and Social Security released their annual reports, which detail the fiscal outlook for both programs. This year, the reports made news for an unexpected reason: they were obsolete by the time they hit the Internet.
Medicare and Social Security are financed by payroll taxes and their respective trust funds. The trustees found that the Social Security trust fund will reach insolvency in 2035. For Medicare, the date is even sooner: 2026. While worrisome, the findings aren’t shocking since they largely echo the conclusions found in last year’s reports.
But the 2020 findings come with one big caveat: they are based on data collected before COVID-19.
COVID-19 is not only a health crisis, it’s an economic one. And it’s placing additional strain on the funding sources for Medicare and Social Security. While we won’t know the exact financial impact until we get a clearer picture of our post-crisis debt and economy, we do know the programs’ funding problems will grow in scope and urgency because of COVID-19.
Here’s a quick look at what you can generally expect going forward:
How will COVID-19 affect Social Security?
In the short term, COVID-19 won’t impact Social Security’s ability to send checks out to beneficiaries. But in the long run, the program’s trust fund will likely reach insolvency earlier than projected.
Social Security is a pay-as-you-go system; most of the benefits sent to retirees are funded by the payroll taxes paid by current workers. High unemployment means fewer people are paying payroll taxes. Meanwhile, the cost of providing benefits to seniors remains the same. So we have less money coming in, but the costs remain relatively stable.
What’s the long-term effect of this imbalance? Experts have predicted impacts large and small.
On the one hand, administration officials told the Associated Press that if employment and tax revenues fully rebound by the end of 2020, Social Security’s insolvency date could move up by a mere six months.
The trustees report, on the other hand, hints at a more dire picture. The trustees always offer a range of estimates in their annual report spanning from low-cost to high-cost. In a typical year, their “intermediate” estimate is the one that makes news because it’s what many experts consider the most likely scenario. However, if the impact of COVID-19 looks more like the trustees’ “high-cost” estimate, then insolvency could move up by four years - from 2035 to 2031.
Whether six months or four years, Social Security’s pending insolvency will likely occur sooner than previous estimates.
How will COVID-19 affect Medicare?
Medicare has trust funds just like Social Security, but they aren’t enough to cover the program’s annual costs.
Consider 2019: That year, the program took in $404 billion in payroll taxes from workers and premiums from seniors. But it spent $796 billion in benefits and other outlays, over 97% more (Table II.B1 of the 2020 Trustees Report). So, in 2019, almost $340 billion of Medicare’s funding came from general tax revenue (or more accurately, from federal borrowing). That’s money the federal government could otherwise use to fund priorities like education, agriculture, or energy, or refrain from borrowing altogether.
Medicare was already having trouble keeping up with its costs, and its trust funds were scheduled to reach insolvency in 2026. At a minimum, COVID-19 will move up the insolvency date, requiring even more general fund tax revenue from federal taxpayers.
How can I learn more?
For those with lots of time for leisure reading, here are links to the Social Security Trustees’ Report (PDF) and the Medicare Trustees’ Report (PDF).
If you’re a data nerd, jump right to the single-year Social Security tables here. Tables and previous Medicare reports are here.
Love good summaries with handy charts and insightful analysis? Stay tuned for our new website coming this fall, and in the meantime, check out coverage from these media outlets:
- Social Security and Medicare Funds At Risk Even Before Virus (Associated Press)
- Social Security Costs Expected to Exceed Income by 2021 (The Wall Street Journal)
- Trustees’ report urges lawmakers to take action ASAP (Bloomberg)