Approaching the Cliff on Social Security and Medicare

 Many posts have discussed Social Security and Medicare.

Jessica Riedl at Brookings:

Social Security and Medicare finances are headed for a reckoning. Social Security has run an annual deficit since 2010, and its trust fund is projected to become insolvent by 2032.1 The Medicare Part A trust fund is projected to follow in 2033.2 Trust fund accounting may sound like a green eyeshade technicality, but it is only one symptom of the broader unsustainability of both programs.

Consider that:

• Far from paying for themselves through payroll taxes and premiums, Social Security and Medicare are running a combined $847 billion cash shortfall in 2026—comprising roughly half of the entire federal budget deficit. 
• Their combined shortfall is projected to reach $2.7 trillion a year within a decade, becoming the overwhelming driver of rising federal budget deficits.4
• Over the following three decades, the two programs are projected to run a cumulative cash shortfall of $157 trillion, with the annual gap reaching 12.4% of GDP by 2056.5
• All told, these shortfalls will account for nearly 80% of all federal budget deficits projected over the next three decades.

Clearly, something has to give—before these shortfalls drive the federal debt to a projected 240% of GDP within thirty years and push interest costs high enough to consume a majority of annual tax revenue.6 Both parties created this unsustainable path, repeatedly expanding Social Security and Medicare benefits well beyond available revenues while failing to account for longer lifespans, fewer workers per retiree, and rising health care costs.

Nor has either party offered a solution. Republican lawmakers take new taxes off the table, while President Trump opposes any benefit reductions. Democratic leaders take benefit changes off the table while pledging to limit new taxes to the wealthiest families and corporations. Neither side will admit that reining in these costs will require both reductions in scheduled benefits and new broad-based taxes.

This report aims to show that Social Security and Medicare sustainability reforms can be designed within progressive principles of protecting low-income seniors and promoting income redistribution down the income ladder. Specifically, it shows that:

A) While benefits for the poorest seniors must be protected, a growing share of today’s Social Security and Medicare spending redistributes income upward—from working families to millions of wealthier seniors whose benefits often far exceed their lifetime contributions to the system. This includes close to $5.6 trillion in benefits set to be paid over the next decade to seniors with pre-benefit incomes over $100,000 (in 2026 dollars), including $2.0 trillion to those above the $200,000 threshold.
B) The soaring cost of these benefits threatens to absorb every plausible tax increase on the wealthy, and even on the non-wealthy, leaving little or no room to fund other progressive priorities such as education, health care, climate, and childcare.
C) Because sharp tax increases face broad opposition, escalating Social Security and Medicare costs are already squeezing spending on other progressive programs—a trend likely to accelerate.

While the “just tax the rich” approach remains popular among progressives, the notion that it alone can close all or even most of a thirty-year, $157 trillion shortfall collapses under scrutiny. Mathematically, even seizing every dollar of billionaire wealth or taxing millionaires at 100% tax rates would fall short.7 Economically, marginal rates on top earners can rise only so far before the resulting economic and incentive effects begin to erode revenue. And politically, for nearly a century even unified Democratic governments have proven unable to enact substantial upper-income tax increases outside of major wars—a constraint likely to persist as Democrats increasingly represent the highest-earning regions, such as California and New York. Taxing the rich belongs in any sustainability plan, but it cannot spare middle-class taxpayers or other spending programs from bearing much of the cost.

Given these constraints, continuing to give retirement benefits for (often wealthy) seniors the first claim on federal revenue will force other priorities—poverty relief, education, health care, climate, childcare, family leave, and infrastructure—to compete for a shrinking pot of remaining tax dollars. Progressives can instead protect the poorest seniors, rein in benefits for wealthier ones, and reserve most new tax increases for those other priorities.