The financial health of Social Security and Medicare, two of the nation’s most crucial safety net programs, improved slightly in 2021 on the back of a strong economic recovery during the coronavirus pandemic, according to two new government reports.
However, both programs continue to face major longer-term shortfalls that could reduce retirement benefits for millions of retirees and limit payments to hospitals that provide care to Medicare patients if Congress doesn’t act to strengthen them.
Annual government reports released on Thursday by trustees of the government’s Social Security and Medicare programs said that the economic recovery from the 2020 recession was “stronger and faster” than assumed in last year’s projections.
But the trustees cautioned that the economic outlook had become more uncertain since mid-February, when the actuaries made their assumptions for the current reports. For now, they are also assuming that the pandemic will not affect the long-term solvency of the programs.
Tens of millions of aging Americans, including 47 million retired workers, rely on Social Security and Medicare to help supplement their income and health care expenses. However, both programs — which are funded by payroll and other taxes — face shortfalls in the future, and legislators have taken little action to address the issue.
The Social Security Old-Age and Survivors Insurance Trust Fund, which pays retiree benefits, will be depleted in 2034, one year later than previously projected. At that time, the fund’s reserves will run down, which means incoming tax revenue will be enough to cover only 77 percent of scheduled benefits.
That is largely a result of demographic shifts. More baby boomers are collecting Social Security payments at the same time as a declining birthrate has produced fewer workers to pay taxes.
“Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare,” the trustees said in summary of the reports. “Taking action sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”
The outlook for the program’s disability fund also improved and, for the first time since 1983, is no longer expected to be depleted within the 75-year projection period. In contrast, last year’s report had projected that the fund would be able to pay scheduled benefits only until 2057. That may seem like a dramatic shift, but administration officials said even modest changes — in this case, slightly fewer disabled people coming on the rolls — can have a large effect because the program’s costs and revenue are so closely aligned.
The forecast for Medicare’s hospital trust fund improved. It is now expected to encounter a shortfall in 2028, two years later than forecast in last year’s report. That change comes mostly because of the improved economic forecast, since the program is funded through payroll taxes.
The actuaries do not expect the pandemic to have any substantial long-term impact on the trajectory of Medicare spending, according to the report. Spending on many elective services declined during the pandemic, while spending on vaccines and treatment for Covid-19 increased. The actuaries said they expected medical spending to return to its normal trend in a few years. But they noted there was “a large degree of uncertainty” about the future of spending related to the virus.
“The pandemic is an example of the inherent uncertainty in projecting health care financing and spending over any duration,” the report said.
Of course, not all of Medicare is funded through the trust fund. The Medicare benefits that cover doctor visits and prescription drugs are funded out of general tax revenues. The report noted that spending on those programs was expected to increase significantly in the coming years and that some current policies about what Medicare pays doctors might need to be revised as the cost of medical care increases, a change that might make the program even more expensive in the future.