Saving Medicare and Social Security needs to be a priority, and Democrats have an ideal way to do it.
The Medicare and Social Security Trustees Tuesday released their latest reports on the future of these key programs. These are the first reports to incorporate estimates of the impact of COVID-19. The news is both good and bad.
The good news is that despite the COVID-19 crisis, things did not get dramatically worse for the two main pillars supporting America’s seniors. Although the Trustees estimate that mortality from COVID will be about 15 percent higher than expected, both this year and for a few years to come, this will not impact the fiscal health of these programs.
That’s because the mortality increase is concentrated among older Americans, who receive benefits, while having a much lesser effect on the workers who pay into the Medicare and Social Security Trust Funds. Fertility, meanwhile, remains on the same downward trend as before COVID. While that will reduce the number of future taxpayers, there has been no dramatic decline in fertility, as was seen after the Great Recession of 2009. This is likely because the massive social safety net put under American workers by Presidents Trump and Biden, including increased unemployment benefits, child care payments and a moratorium on evictions, eased the economic pain of the pandemic and allowed most people to maintain their current condition.
The greater fear about COVID was that by putting millions out of work, the payroll taxes that support Medicare and Social Security would take a huge hit. There was some such effect for part of 2020, but the rapid bounce-back in employment this year has mitigated that effect. Assuming employment continues its return to pre-pandemic levels, buoyed by a strong rise in consumer spending, the income to the two Trust Funds should recover as well.
But there was bad news too. As America continues to age and the baby boomers retire, the payouts from the Medicare and Social Security funds continue to increase. And the revenues that support these programs, not having been shored up in recent years, continue to lag payouts by ever larger amounts. As a result, the Trustees forecast that the Social Security Trust Fund will be emptied in 13 years, when today’s 54-year-olds reach full retirement age. That is one year earlier than forecast in their previous report.
At that point, benefits – paid for solely by current payroll taxes with no Trust Fund – will have to be cut by 26 percent for all current and future recipients to keep the Fund solvent. Or, to keep benefits at the currently mandated level, social security payroll taxes would have to rise by 27 percent immediately, from next year onwards, if nothing else is done. This is a conservative estimate. It does not include the risks that long-COVID – if it does indeed affect tens of millions of Americans in the future, increasing the numbers who are unable to work or who develop early onset dementia – significantly increases the fund’s disability benefits and medical payouts.
The report on Medicare is even more distressing. The Hospital Insurance Trust Fund is forecast to be exhausted in just five years. To be sure, 2026 is the same cut-off date the Trustees gave for Medicare’s Hospital Insurance Fund last year — only now that date looms another year closer. This is the closest that the Medicare Trust Funds have been to insolvency since 1997. Without new funding, American seniors will have their hospital benefits cut by 16 percent starting in 2026. To maintain currently mandated benefits, the Trustees say a 27 percent increase in Medicare payroll taxes on all working Americans is needed.
As we emerge from the stresses of the COVID pandemic, it should be obvious to all that these outcomes are unacceptable. Americans will not accept either benefit cuts to all present and future recipients of 16 percent to 22 percent or immediate payroll tax increases of over 25 percent. What, then, is to be done to save these essential programs?
The answer is surprisingly simple. A wealth tax on ultra-millionaires, of the kind already being discussed by Democrats, will provide an immediate, fair and equitable solution. The wealth tax proposed by Sen. Elizabeth Warren (D-Mass.) – an annual 2 percent tax on every dollar of net worth above $50 million and a 6 percent tax on net worth above $1 billion – would bring in $3.75 trillion over a 10-year period. The Congressional Budget Office estimates the program deficit for the Social Security and Medicare Hospital Insurance funds over the next 10 years will be $3.4 trillion dollars.
Thus, both Social Security and Medicare can be made whole for all Americans, both current and future retirees, without any cuts in benefits or increases in payroll taxes, if Congress simply adopts a modest wealth tax that would not affect 99.9 percent of Americans.
Now, the objection will be made that a wealth tax is somehow new and discriminates against those who have accumulated great wealth. That is not true. Most Americans today already pay a wealth tax of about 1 percent on the most important element of their household wealth — their homes. Homeowners’ property taxes, which are no longer even tax exempt, are about 1 percent in most states.
What exists today is a massive tax-exemption for non-real estate wealth that is enjoyed mainly by the very richest Americans. Why should ultra-millionaires and billionaires be exempt from taxes on their wealth, which is held mostly in financial assets, while working men and women in America who own homes almost all pay an annual levy on their main wealth assets?
To be sure, there are other reforms to Social Security that should be considered, such as continuing to raise the maximum age of retirement (which currently is 70, probably five years too low); making allowances for people to work part-time and receive partial Social Security payouts without penalty; and imposing benefit income caps. Why should ordinary Americans’ payroll taxes be used, in any part, to pay almost $50,000 each year in benefits to those who already have other retirement income over $500,000 per year? Social Security was intended to provide security – to protect seniors from poverty – not to gild the lily for those already enjoying rich private retirement benefits.
Social Security and Medicare’s Hospital Insurance have been the critical supports for middle class Americans facing retirement for nearly a century. But that will end soon unless something drastic is done. To avoid major benefit cuts or payroll tax increases, wealth taxes on the ultra-rich provide a simple and fair solution.
Democrats should package a wealth tax with provisions that dedicate its revenues to shoring up Medicare and Social Security. Support for these essential programs has been, and should remain, bipartisan. Linking a wealth tax to the survival of these programs should make a wealth tax less partisan as well. If the GOP chooses to oppose this combination, they will be voting against saving Social Security and Medicare, hence for cutting benefits or raising taxes — something they have sworn not to do.
Dedicating a wealth tax to supporting Social Security and Medicare is not only necessary; it’s the best way to protect the future of all Americans, and to get bipartisan support for doing so. It’s a win-win-win.
Jack A. Goldstone is Hazel Professor of Public Policy at George Mason University’s Schar School of Policy and Government.