Why Social Security and Medicare Cannot go Bankrupt - Really

Understanding What Bankruptcy Means With Respect to These Programs

It is popular for parties on all sides of the issue to come forth with statements that the two major entitlement programs provided by the Federal Government, Medicare and Social Security will go bankrupt unless they are changed. Rep. Eric Canton (R, Va) is quoted in Politico

"As far as Medicare is concerned, there’s a simple choice here - either we’re going to save the program or let it go bankrupt."

and George W. Bush frequently pushed his privatization of Social Security by saying the program would be bankrupt.  Democrats are equally culpable in this regard.

The purpose of such statements is illustrated by the Cantor quote, which is to say either take our alternative or the programs will go away.  Of course, like almost all political rhetoric, this is simply not true.

Medicare and Social Security are funded by payroll taxes, with equal contributions from employees and employers.  The money is deposited into a Trust Fund.  Benefits are then paid out of the Trust Fund.  The Trust Funds currently have balances in the hundreds of billions of dollars.

Now most forecasts are that the Trust Funds will be exhausted at some point in the future.  This is because benefits provided by politicians are not actuarially tied to the taxes that pay them.  After all what successful politician hasn’t voted for increases in benefits and no increase in taxes to fund them.  However, when the Trust Funds have a zero balance, it does not mean the programs are not being funded, it means that they are not being funded at the level needed to pay for all the promises.

Money will come into the Trust Funds every year from payroll taxes, just not enough to pay statutory benefits.  For Social Security, if nothing changed this might mean benefits being paid at 75% to 80% of statutory levels.  For Medicare, this number is unknown because of uncertainty over future medical costs, but it is probably in the same range. And so the worse case scenario, which assumes Congress does nothing to change Social Security and Medicare funding means simply that the programs continue with lower benefit payments.

Mr. Cantor is wrong, which is not an unusual event.  The choice is not between “saving Medicare which his party’s program does not do (see The Dismal Political Economist’s comment on the Ryan Plan) and letting it go bankrupt..   The choices are between (A) fully funding Medicare, (B) changing its structure and benefits, (C) eliminating the program and replacing it with something else (The Ryan Plan) or (D) the default choice, which is to continue the program as is with a lower level of benefits.

If nothing is done (D) will be the option selected.   Neither Social Security nor Medicare will go bankrupt and disappear.   Once this is understood discussion on the future of Social Security and Medicare can take on a much more rational tone, although that’s a pretty unlikely event.