These two risks to Social Security and Medicare loom large

It’s an election year, so politicians are making pledges to protect Medicare and Social Security. Consistent with previous years, Democrats are claiming that Republicans will cut both programs despite former President Trump’s pledge. In truth, the two real risks to Medicare and Social Security are inflation and low economic growth. 

In March of this year, Trump clarified his stance on entitlements when he declared that he "will never do anything that will hurt or jeopardize Social Security or Medicare." President Biden, of course, made a similar pledge — despite at one time calling for cuts. 

While candidates make such claims, the reality is that the other policies and actions of many politicians are directly hurting both programs. 

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As we consider that point, it must be noted that the "solvency" of those programs is of constant concern. Recently, in May, the Bipartisan Policy Center published an article titled: "Solvency Boost: Medicare Gets Five More Years." Within the article, it states "the trust fund’s depletion is delayed until 2036, a significant extension from the previous estimate of 2031." 

For its part, according to the Social Security Administration, "Social Security can pay full benefits for 11 more years but then faces a significant, though manageable, funding shortfall." 

Obviously, given the magnitude of those programs — the two largest in the federal budget — the solvency of those programs is of no minor concern. 

Of course, many have called for "reforms" to those programs. Those possible "reforms" include raising taxes, cutting benefits and increasing the age at which beneficiaries become eligible for benefits.  

Benefit cuts and age changes, of course, are third-rail discussion points for politicians. 

Given the above, it is time to recognize two of the greatest, if not the greatest, threats to Social Security and Medicare: (1) inflation and (2) weak economic growth that results in reduced program revenues. 

If we start with inflation, it should be obvious that inflation eats away at consumers’ purchasing power. It also increases medical provider costs and overall Medicare program costs. 

Health and Human Services is not shy about admitting that, and its website touts the Inflation Reduction Act as providing numerous categories of benefits for recipients. They include caps on drug prices and inflation rebates. 

For its part, Social Security benefits automatically increase when inflation increases. 

What those government responses have in common is that Medicare and Social Security expenditures increase in response to inflation. Increased expenditures, obviously, exacerbate the solvency problem both programs face. 

That brings us to the funding of those programs. Both programs are funded in significant part through payroll taxes. Social Security is financed through a dedicated payroll tax and Medicare is financed through "primarily from general revenues (46%), payroll tax revenues (34%), and premiums paid by beneficiaries (15%)" (2021 data). 

Given those sources, it should be just as obvious that (1) lower economic growth reduces government revenues, and, therefore, (2) lower economic growth exacerbates the solvency of Medicare and Social Security. Indeed, it jeopardizes all government expenditures. 

On that point, politicians must come to accept their role in causing inflation and lower economic growth. Starting with inflation, a $35 trillion national debt, annual deficits of $2 trillion and a central bank that prints money to accommodate that spending, along with regulations that drive up the cost of energy, goods and services, are the sources of American inflation — not everyday Americans or corporate greed. 

We had 40 years of relatively stable and low inflation. Corporate greed existed in those years as well. It didn’t suddenly spike when Biden became president — nor did bad consumer habits.  

On the other hand, continued high spending after the economy recovered from the COVID-19 lockdown, following the Federal Reserve’s flooding of the market with printed dollars to "recover" from the COVID lockdowns, matched with higher regulations, are the cause of inflation.  

As for lower economic growth, average economic growth from the 1950s to today has been reduced from yearly averages of 4% average annual growth between 1950-73 to 2% or less in the last two decades. 

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In plain terms, the greater the percentage government spending is as a portion of the economy, the greater the burden on the economy government poses, taxes included. Since 1965, federal government spending has exploded and consistently outpaced revenues. Adjusted for inflation, federal spending per person has grown from $4,333 in 1965 to $19,594 in 2023. 

What those government responses have in common is that Medicare and Social Security expenditures increase in response to inflation. Increased expenditures, obviously, exacerbate the solvency problem both programs face. 

Further, since the 1950s, the cost of just federal regulations has exploded to in excess of $2 trillion a year. The state regulations raise that figure even higher. In fact, if regulations were an industry, they would be the third-largest behind government and health care (which is funded by government). 

Since 1980 alone, according to the Mercatus Center, due to accumulating regulations, "economic growth has been dampened by approximately 0.8 percent per annum since 1980. Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012 (i.e., regulatory growth since 1980 cost GDP $4 trillion in 2012, or about $13,000 per capita)." It has only become worse since then. 

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That slower 2% growth kicks off less revenue than the historic rate of 4%. That also means the declining solvency of Medicare and Social Security is directly tied to lower economic growth. You can add to that the decline in labor rate participation. 

In sum, while politicians claim that their opponents are a threat to Social Security and Medicare, the real dangers to both programs are politicians themselves. Their policies have led to inflation and lower economic growth, which are the greatest risks to those programs. If anyone wants to save those programs, they must reduce the burden on the economy as a whole and rein in spending — it’s that simple. 

Thomas Del Beccaro is the author of "The Lessons of the American Civilization" and "The Divided Era."