Home Federal Government Social Insecurity: 5. Fixing the Social Security and Medicare Programs

Social Insecurity: 5. Fixing the Social Security and Medicare Programs

Social Insecurity: 5. Fixing the Social Security and Medicare Programs

The four prior articles outlined in detail the revenue sources and expenditures of the Social Security and Medicare programs.  They also discussed the rapid growth of expenditures resulting from the aging demographic of America and rising health care costs.

This article will discuss the very real fiscal challenges that these important social insurance programs are facing.  It will also try to point out solutions that the country and our elected representatives have available to consider.

As discussed in the prior articles, the annual government payments made above and beyond dedicated and recurring public revenues are set to grow sharply in the years ahead, as follows:

 Social Security and Medicare Government Payment Forecast ($ billions)


Fiscal Year 2017

2026 Forecast

Social Security



Medicare Hospital Insurance



Medicare Parts B and D



Total Government Payments



Source: Financial Report of the United States 2017, Social Security Trustees Annual Report 2017, Medicare Trustees Annual Report 2017

So, in 2017, the government had expenditures of $347.2 billion IN EXCESS of dedicated revenue sources to fund Social Security and Medicare.  This is forecast to grow to $944.7 billion in just nine years.  Where will all this money come from?

From a fiscal perspective, we start in a very difficult and challenging position.  The federal government deficit was $666 billion in fiscal year 2017. As a result of the Tax Cuts and Jobs Act and the 2018 bipartisan budget act, the government deficit will reach about $1 trillion in fiscal year 2019.

The federal government already has a staggering level of debt and its ability to borrow a trillion or more every year will, at some point, hit a limit.  As we approach that point, the pressure to address the federal government deficit in a meaningful way will intensify.  It is against this backdrop that the growing Social Security/Medicare funding gap will be debated.

It is disappointing that the federal government has failed to act to shore-up Social Security and Medicare.  The longer the funding issues are left unresolved, the bigger the problem becomes.

There are a great many policy solutions that can be considered, debated and implemented to fix these programs, some of which are outlined below.

 Program Specific Changes 

1.     Raise FICA Payroll Taxes.  The Medicare Hospital Insurance funding gap is quite modest and small incremental increases in Medicare payroll taxes over time could fill the gap. The Social Security funding gap is much bigger.  Unlike Medicare, Social Security payroll taxes are only assessed on the first $128,000 of income (Medicare tax rates actually increase for incomes above $200,000). In addition to simply raising Social Security tax rates, there is also the option of expanding the tax to cover all income levels, which would materially increase the tax base.

2.     Reduce the Social Security Cost of Living Adjustment.  Right now, Social Security benefit payments are indexed to the Consumer Price Index. A reduced formula could be implemented.

3.     Increase deductibles, co-pay requirements and insurance premiums on Medicare, thereby reducing benefit payments.  This could be done across the board or on the basis means testing, so beneficiary costs are pegged to income or net worth levels.

4.     Introduce means testing to Social Security, whereby benefit payments are reduced for high income or high net worth individuals.

5.     Expand the age of eligibility for both Medicare and Social Security.

6.     Reduce Medicare fraud.  Medicare has the highest level of Improper Payments of all government programs.  Greater investment in fraud prevention could have material long-term benefits.

7.     Reduce health care costs.  The US has some of the highest drug and health care services costs in the developed world.  Using the buying power of Medicare (and Medicaid) to negotiate prices across the health care landscape might greatly reduce the rate at which health care prices rise. Other cost containment measures could also be considered.

8.     Reduce Medicare’s physician fee schedule or the rate at which it grows.

9.     Migrate away from the Medicare fee-for-service model to a managed care model under which costs are more containable.  30% of Medicare beneficiaries are now under Plan C, and this could be expanded.

Government-Wide Changes

 1.     Raise income taxes to reduce the federal deficit and make room for greater Medicare and Social Security spending in the years ahead (the government just did the opposite).

2.     Cut other programs deemed less important than caring for old-age citizens, thereby reducing the deficit and making room for great Medicare and Social Security spending. This could be quite a long list of programs.

3.     Reduce the tax gap. The Government Accountability Office estimates that $470 billion of taxes due go uncollected each year.  Greater investment in IRS enforcement could have material long-term fiscal benefits.

The items listed above are not intended to be definitive.  Instead, they are simply meant to illustrate that there are a multitude of public policy options available to address the Social Security and Medicare funding gap.

While we wait for our elected representatives in Washington to definitively address the issue, the deficit will grow, the debt will grow, the interest expense will grow and the problem will simply become bigger and more difficult to tackle.

In the mean time, we can all keep paying FICA payroll taxes and income taxes on Social Security benefits and hope for the best!








Please enter your comment!
Please enter your name here