February 15, 2023
A New York Times article on the economics and politics around Social Security and Medicare begins by telling readers:
President Biden scored an early political point this month in his fight with congressional Republicans over taxes, spending and raising the federal debt limit: He forced Republican leaders to profess, repeatedly, that they will not seek cuts to Social Security and Medicare.
In the process, Mr. Biden has effectively steered a debate about fiscal responsibility away from two cherished safety-net programs for seniors, just as those plans are poised for a decade of rapid spending growth.
It is not clear that “fiscal responsibility” has anything to do with this debate. First, it is not clear what that expression means. Would it have been fiscally responsible to have more deficit reduction in the years following the Great Recession, with the economy recovering slowly and unemployment remaining high?
In those circumstances, more deficit reduction would have meant slower growth and higher unemployment. Perhaps the New York Times would define deficit reduction that hurts the economy as being “fiscally responsible,” but it is not clear that most people would accept that definition.
The other part of the story is that Republicans have repeatedly demonstrated by their actions that they don’t care about budget deficits. Every time the Republicans have regained the White House in the last four decades, they have pushed through large tax cuts that resulted in large increases in the budget deficit.
Seeing this behavior, it is absurd to imagine that the leaders of the Republican Party are concerned about budget deficits (if this is how we are defining fiscal responsibility). They may claim to be concerned about budget deficits, but it would be irresponsible to imply that they actually are concerned about budget deficits.
In short, this is alleged to be a debate over “fiscal responsibility” or budget deficits. There is little reason to believe, at least on the Republican side, that this is actually a debate over budget deficits.
Spending on Social Security and Medicare Has Been Far Less Than Projected
It is also worth noting that the dynamics of the shortfalls facing Social Security and Medicare are somewhat different than implied by this piece. Social Security spending has already been rising rapidly, since most of the baby boom cohorts have already reached retirement age. Social Security spending rose from 4.19 percent of GDP in 2000 to 5.09 percent of GDP in 2023, an increase of 0.9 percentage points. It is projected to increase to 5.95 percent of GDP by 2040, a further rise of 0.84 percentage points.
This means that, in terms of its economic impact, we will not be seeing anything qualitatively different from what we had been seeing from Social Security. There is a different story going forward in that the dedicated trust fund built from the Social Security tax is projected to face a shortfall, but that is an issue of allocating governmental resources, not a question of requiring a more rapid diversion of resources to Social Security than we have been seeing for decades.
It is also worth noting that the cost increases for both Social Security and Medicare have been far less than had earlier been projected. The 2000 Social Security Trustees Report projected that Social Security spending would increase by 2.07 percentage points by 2025, to 6.26 percent of GDP. The 2022 Trustees report shows costs increasing by just 1.17 percentage points to 5.26 percent of GDP in 2025.
While there have not been explicit cuts to Social Security, changes in both practices and society have led to slower-than-projected cost growth. In the former category, a far higher rate of denial for disability claims has substantially reduced the cost of the disability program. In the latter category, the slower growth in life expectancy, especially for non-college-educated workers, has reduced the cost of the Social Security program. These are not necessarily positive developments, but they mean that Social Security is now costing far less than had been projected in the not-so-distant past.
There is a similar story with Medicare cost growth. Its spending was projected to rise by 0.61 percentage points to 2.0 percent of GDP in 2025. Its costs are now projected to rise to 1.68 percent of GDP in 2025, an increase of just 0.29 percentage points. This smaller increase is the result of a sharp slowing in healthcare cost growth after the passage of the Affordable Care Act in 2010. Here also, we have seen substantial savings against projected spending, even if there were no explicit cuts in the program.
Upward Redistribution Has Been a Major Factor in the Projected Social Security Shortfall
It is also worth noting that much of the projected shortfall in the Social Security program is due to the upward redistribution of income over the last four decades. In 1982, when the last major changes to Social Security were put into place, 90 percent of wage income fell below the cap on taxable wages (currently $160,200).
In the last two decades, just over 82 percent of wage income was subject to the Social Security tax (see page 148). There was also a redistribution from wage income to profit income, which further reduced Social Security tax revenue. Together, this upward redistribution accounts for more than 40 percent of the program’s projected shortfall over its 75-year planning horizon. If we had not shifted so much income to high-end earners and to profits, closing the projected shortfall in Social Security would be a far more manageable task.