The window of opportunity to make up the shortfalls in the Social Security and Medicare trust funds is closing, and the longer the government delays, the harder it will be to keep the funds intact, according to a new analysis from the Bipartisan Policy Center.
Social Security, financed through payroll taxes, faces a 75-year financing shortfall equal to 17% of projected costs while the Medicare Hospital Insurance program faces a shortfall of 14% of projected costs. If no changes are made to the financing or benefits of Social Security, its trust fund will be depleted by 2034; benefits could be cut by 23% or payroll taxes increased from 12.4% to 16.4% to maintain the fund’s solvency.
Doing nothing to address the shortfall in the Medicare trust fund, which is financed primarily from general government funds, would increase pressure on the federal budget.
“The imbalance is so large it’s an open question whether lawmakers will do something to close the shortfall, which gets harder to close with every passing year,” said Charles Blahous, III, one of the report’s authors who spoke at a BPC dicussion Wednesday on Retirement in America.
Robert Reischauer, his co-author, recommended that any steps taken to close the financing gap should concentrate on those further from retirement, but Blahous said baby boomers should also be part of the solution.
Blahous and Reischauer are the last two public trustees of the Security Social Security and Medicare trust funds. They left after the 2015 Trustees reports were published and haven’t been replaced.
There also hasn’t been much movement in Washington to address the trust funds' shortfalls.
“Washington’s role to lead is more divorced from any financial reality than any time I can remember,” said Kent Conrad, former Chairman of the Senate Budget Committee, who participated in another panel at the conference. “What is being seriously discussed is a budget that will add $1.5 trillion to the debt, which is already too large.” He was referring to a Senate Budget Committee plan to cut taxes.
Conrad and BPC favor a fix for Social Security that splits the difference between raising revenues and cutting benefits while simultaneously increasing benefits for the bottom 20% of the income ladder in order to reduce poverty among the elderly. They also support providing widows and widowers expanded benefits (75% of their deceased spouse’s benefit in addition to the entirety of their own) and more flexible retirement accounts for companies with less than 500 employees, with a tax credit provided to companies that match employees’ contributions to some extent.
“There has to be changes in the law; there has to be leadership. It shouldn’t be partisan and it needs to be done quickly,” said Conrad. “We’re in such a toxic environment in this town right now that it’s very hard to have a rational discussion about things that don’t dominate the news hours of every hour of every day.”
The retirement savings issue is not limited to Social Security and Medicare. It also involves workplace retirement plans, which are currently unavailable to 30% of American workers and almost half the employees of small companies, said Ronald O’Hanley, CEO of State Street Global Advisors, who sat on the panel with Conrad. “The real issues are acute now.”
O'Hanley, Conrad and Jason Fichtner, senior research fellow at Mercatus Center at George Mason University, favor a comprehensive package to support retirement security that addresses shortfalls in both government and private retirement plans. The package would be subject to a single up or down vote.
“It has to be comprehensive,” said O’Hanley. “I would not piecemeal this.”Retirement Assets of Many Households Fell Between 2013 and 2016: CRR 3 Defenses Against Retirees' Biggest Challe TIAA Calls for More Annuities in Workplace Retirement Plans