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Two-Minute Take: Entitlements Going Bankrupt?

Cullum Clark, Bush Institute-SMU Economic Growth Initiative Director, explains the Social Security and Medicare Trustees annual reports.

Article by J.H. Cullum Clark June 8, 2018 //   4 minute read

The Social Security and Medicare Trustees annual reports state that Medicare is on track to be bankrupt by 2026, and Social Security Trust Funds for disability and old-aged benefits will be bankrupt by 2034. Cullum Clark, Bush Institute-SMU Economic Growth Initiative Director, explains what's next. 

What policy changes can be made to prolong these programs’ solvency, and how fast do they need to be implemented? 

For the first several decades, the Social Security and Medicare programs collected more in taxes and premiums than they spent on beneficiaries, and they were able to share their “profits” with the U.S. Treasury in exchange for IOUs.  Now, both programs are drawing down these IOUs to pay for current benefits, a trajectory that is unsustainable. The looming “bankruptcy” dates in 2026 and 2034 mean the programs can fund their obligations until then without a change in legislation by the U.S. Congress. After that, both programs will have to slash benefits absent new legislation. These projected dates present Congress with two critical reform deadlines. 

Congress can put Social Security on a sustainable path by changing its benefit formulas to increase engagement in the workforce for people up to 70 years old. People are living much longer than they did the last time the benefit formulas were adjusted in the 1980s, and people in their 60s are much healthier than their counterparts a generation or two ago. However, there should also be nuance in the formula for those working physically demanding jobs at the age of 68 or 69.  It is also reasonable to put in motion a long-term plan to scale back benefits for high-income individuals. 

Reforming Medicare is much more complex. A starting point is to realize that Medicare is very generous to beneficiaries and contains many perverse incentives. In all likelihood, there is no politically viable plan to make the program financially sustainable that won’t involve Congress increasing its appropriations to the program to honor the social compact the U.S. Government has made with America’s current and soon-to-be seniors.  

Social Security and Medicare are contributing significantly to the federal debt. What is the long term implication of these programs on the economy? 

The Congressional Budget Office projects by 2028 major entitlement programs will consume almost 15 percent of America’s GDP and more than 75 percent of federal revenues, compared to 12 percent of GDP and less than 60 percent of revenues today.  By the early 2050s, they will take up some 19 percent of GDP.  As the programs consume more of our scarce resources, they are already crowding out other public-sector spending priorities: education, research, infrastructure, and veteran care.  

In the coming decades, the programs will crowd out a good bit of private sector capital investment as well as research and development. This is bad news for economic growth in our country. Growth depends, among other things, on producing an educated 21st century workforce, sustaining our technological lead in the world, and modernizing our physical infrastructure.