If lawmakers continue to ignore the shortfalls, even a partial fix could require a payroll tax increase to 20%, Reischauer says. “Lawmakers’ current posture of inaction with respect to Social Security and Medicare finances is clearly untenable. The window of opportunity for repairing Social Security and Medicare finances is closing,” he says.
Worse, various strategies for addressing program shortfalls will become increasingly impractical if program finances are not addressed soon, they say. For example, policymakers have historically enacted changes to strengthen these programs’ finances without decreasing the benefits of individuals already receiving them.
If policymakers took this approach today, closing the Social Security shortfall without raising taxes would require a benefit reduction of 20 percent for those becoming eligible after 2017, according to the report. If action were delayed until 2034, when Social Security’s trust funds are depleted, only changing benefits for newly eligible beneficiaries (even 100 percent reductions in benefits) would be insufficient to maintain continuous trust fund solvency.
Alternatively, pursuing solvency through payroll tax rate increases, starting in 2034, would require the combined employer-employee Social Security tax to increase from 12.4 percent to 16.4 percent. Similarly, a Medicare HI tax increase from 2.9 percent to 3.7 percent would be needed in 2029— which would result, along with the aforementioned Social Security payroll tax increase, in a total payroll tax rate exceeding 20 percent.
Policymakers face difficult trade-offs: Reducing program benefits risks undermining income security, whereas solutions based entirely on tax increases risk lowering workforce participation as well as worker standards of living, particularly for vulnerable populations, the report finds.
One thing that is certain is that Medicare and Social Security are placing increasing pressure on the federal budget, the report says. The challenges of financing Medicare and Social Security are substantial and continue to grow, even though trust fund insolvency is a number of years away, the trustees say