Social Security and Medicare Funds Still Face Long-Term Shortfalls, Report Says

WASHINGTON — The financial health of Social Security and Medicare, two of the nation’s most crucial safety-net programs, continues to be strained as the U.S. economy faces the prospect of sluggish growth, underscoring the pressure lawmakers in Congress and the Biden administration are facing to take action to preserve benefits for millions of retirees.

Annual government reports released on Friday by trustees of the programs showed that both still face substantial long-term shortfalls that could lead to reduced retirement benefits and smaller payments to hospitals that provide care to Medicare patients.

The future of the programs has re-emerged as a hot political debate as Democrats and Republicans engage in negotiations over raising the nation’s debt limit later this year. Some Republicans have called for spending cuts and some want to restructure Social Security and Medicare, while Democrats have insisted that the programs must remain fully intact.

“Social Security and Medicare are two bedrock programs that older Americans rely upon for their retirement security,” Treasury Secretary Janet L. Yellen said in a statement on Friday. “The Biden-Harris administration is committed to ensuring the long-term viability of these critical programs so that retirees can receive the hard-earned benefits they’re owed.”

The coronavirus pandemic and the ensuing recession and burst of inflation created additional uncertainty about the programs in recent years, an uncertainty that was reflected in the reports.

The Social Security Old-Age and Survivors Insurance Trust Fund, which pays retiree benefits, will be depleted in 2033, one year earlier than previously projected. At that time, the program will have funds to pay only 77 percent of total scheduled benefits.

The trustees said the change was the result of downward revisions to projections for labor productivity and economic growth and in the United States. The programs are funded through payroll taxes, which are more robust when the labor market is tight and wages are high. The Federal Reserve’s recent efforts to tame inflation with interest rate increases are slowing growth and threatening to tip the economy into a recession.

A separate part of Social Security, which funds disability benefits, is in better financial health. Its trust fund will be able to pay its bills as far into the future as the trustees considered, a finding similar to that in last year’s report.

The financial health of Medicare has improved somewhat since last year’s report. The trustees now estimate that Medicare’s hospital trust fund will have enough revenues to pay all its bills until 2031, three years later than last year’s estimate.

The update reflects growing evidence about the long-term effects of the Covid-19 pandemic. The Medicare actuary found that beneficiaries who have survived were in substantially better health compared with the baseline health of those who died from the disease, altering projections for the costs of their care in the coming years.

The report also documented the continuation of a long-term trend, in which Medicare’s health care spending is growing more slowly than it has over its long history. The causes of this trend are hotly debated among researchers, some of whom attribute them to economic trends in the years after the Great Recession, and others who credit changes in the practice of medicine. The report, for example, noted that more hip and knee replacements are occurring as outpatient procedures, a shift from longer, more-expensive hospital stays.

Medicare’s hospital bills are paid from a trust fund with dedicated resources, but hospital care represents only a fraction of Medicare’s overall spending. The report also examined the future of spending for doctors’ services and prescription drugs. Spending on prescription drugs is expected to be substantially lower than in previous estimates, thanks to provisions of the Inflation Reduction Act, which allow Medicare to regulate the prices of certain medications.

But despite the forecast of the fund’s improved health, the trustees warn that Medicare is on an unsustainable path. The program is set to begin drawing down its reserves in 2025. When those reserves are exhausted, which is estimated to happen in 2031, Medicare is predicted to have enough revenue to pay hospitals only 89 percent of their fees under current law.

President Biden has proposed policy changes to help extend the life of the hospital trust fund. In his budget, he called for increasing taxes on high earners and on certain types of businesses to help pay Medicare’s bills. He also proposed increasing Medicare’s regulation of prescription drug prices and redirecting those savings toward financing the program’s hospital bills. Those changes would extend the life of the trust fund by 25 additional years, according to the White House.

Historically, Republicans have also warned about Medicare’s long-term financial trajectory and offered policy changes to reduce its spending. But discussion of such cuts has become more muted in the party this year. House Speaker Kevin McCarthy has said he will not propose any spending reductions for the program in negotiations over lifting the nation’s borrowing limit.

But addressing America’s fiscal problems is difficult without making changes to the social safety-net programs. The Congressional Budget Office said in February that spending growth for Medicare and Social Security is rapidly outpacing the growth in federal tax revenues over the next 10 years and that by 2033 the federal government will be spending as much on Social Security alone as it does on all discretionary spending — military and otherwise — combined.

Groups representing older Americans have called on lawmakers to put aside their differences and take action to protect the programs before it is too late.

“Congress must take its responsibility to protect Social Security and Medicare seriously, by developing a comprehensive plan and doing so in a way that is accountable and fully transparent to the American public,” said Jo Ann Jenkins, chief executive of AARP.