Washington bickering sets up Social Security, Medicare for big cuts

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Washington policymakers are pledging to exclude Social Security and Medicare from this year’s debt ceiling and spending negotiations, but that doesn’t keep those popular entitlements from inching dangerously close to running out of money.

Social Security and Medicare are on track to go bust in 12 years, meaning people who are now 55 will get hit with significant benefit cuts unless Congress acts.

“Washington has only a decade to save Social Security before the law calls for a 20% across-the-board benefit cut,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “They have even less time for Medicare.”

Medicare’s board of trustees estimates its hospital insurance trust fund, which covers inpatient hospital stays for individuals 65 and older, is slated to run out of money by 2028. The trust fund is financed by a 1.45% payroll tax that is levied equally on employers and employees.

Once the trust fund runs dry, Medicare will face a 10% budget shortfall starting in 2029, when patients are likely to see a cut in services for hospital stays and hospice. The trust fund does not cover other parts of Medicare such as subsidies for prescription drugs and physician visits, which are funded by patient premiums and state governments.

Social Security retirement and survivor benefits are on course to run out of money by 2033. The program faces a shortfall as the U.S. population ages and birthrates remain low. If Congress does nothing, only 78% of Social Security benefits will be payable by 2034.

At that time, CRFB estimates that Social Security benefits will automatically be slashed by 20% — resulting in a $12,000 to $17,000 benefit cut for a retired couple.

Lawmakers acknowledge that both programs are facing a looming crisis, but few agree on how or when to do something about it.

President Biden and House Speaker Kevin McCarthy have agreed to exclude Medicare and Social Security from negotiations over raising the cap on how much the federal government can borrow to meet expenditures. In the negotiations, Mr. McCarthy wants spending cuts in exchange for raising the debt limit to avoid default. Mr. Biden wants the debt ceiling raised with no strings attached.

“Cuts to Medicare and Social Security are off the table,” said Mr. McCarthy, California Republican. “Defaulting on our debt is not an option. But neither is a future of higher taxes, higher interest rates, and an economy that doesn’t work for working Americans.”

Mr. Biden has accused Republicans of gaming the debt limit to achieve an extremist agenda.

“Some of my Republican friends want to take the economy hostage — I get it — unless I agree to their economic plans. All of you at home should know what those plans are. Instead of making the wealthy pay their fair share, some Republicans … want Medicare and Social Security to sunset,” he said in the State of the Union address.

The remark drew jeers from Republican lawmakers who accuse Mr. Biden of fearmongering because they’ve walled-off entitlements.

Excluding Social Security and Medicare from the debt-ceiling talks comes even as previous Congresses have used the debate to strike deals on curbing spending and balancing the budget. It also means that lawmakers are stuck looking for other opportunities to start negotiations to save the programs.

Sen. Mitt Romney, Utah Republican, has a bipartisan bill to create a series of “rescue committees” to tackle Medicare, Social Security and other programs facing insolvency. The legislation would require the panels to devise a solution within 180 days and for the recommendations to get expedited consideration in Congress.

Despite having significant bipartisan support, it is unclear whether a “rescue committee” would be able to devise a successful plan. That’s because lawmakers are bitterly divided on how to fund the politically popular programs.

Sen. Joe Manchin III, West Virginia Democrat, has called for a 1% cap on how much federal spending for programs such as national defense, education and foreign aid can grow over the next decade.

“It will not be easy, but now is the time for President Biden and our congressional leaders to come together and have an honest, open, and public discussion about what we can and must do in the best interest of our nation,” Mr. Manchin said. “Failure is not an option.”

Republicans are unlikely to go for the cap because they want to see defense spending increase, especially as the U.S. faces geopolitical challenges from Russia and China. Democrats, meanwhile, have been opposed to cutting spending for social welfare programs amid high inflation that recently peaked at a 40-year high.

Another proposal by Sen. Bernard Sanders faces similarly long odds despite strong support from Democrats. The Vermont independent introduced legislation to raise taxes and increase the pool of money available to fund Social Security and Medicare.

Currently, Social Security is funded by a 6.25% payroll tax that both employers and employees pay on income up to $147,000. Mr. Sanders’ bill would erase the cap and impose a Social Security tax on all income above $250,000 including capital gains, stock sales and other non-payroll earnings.

“The Social Security Administration has estimated that our legislation to expand Social Security benefits by $2,400 a year will fully fund Social Security for the next 75 years,” Mr. Sanders said.

The plan is a non-starter for Republicans, who are unified on opposing tax hikes. 

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