Social Security and Medicare are arguably the two most important programs for seniors in this country. Deciphering which one bears greater importance tends to depend on your age.
For current retirees, you're liable to receive more from Social Security over your lifetime than the savings you'll receive from Medicare. In fact, 62% of current retirees lean on Social Security for at least half of their monthly income, according to the Social Security Administration (SSA). But as medical care costs outpace Social Security's cost-of-living adjustments over time, today's younger workers could find that Medicare is their most important social program with regard to total lifetime benefits received.
Unfortunately, neither of these crucial programs is in the best of health, according to their respective Board of Trustees' annual reports. Social Security's trust is expected to begin paying out more in benefits than it's generating in revenue by 2022, leading to a complete exhaustion of its projected $3 trillion in asset reserves by 2034. Should this happen, and Congress fails to act between now and 2034, an across-the-board cut in benefits of up to 23% for current and future retirees may be needed to sustain payouts through 2091.
The story is similar for Medicare. The latest trustees report predicts that Medicare's Hospital Insurance Trust, which will also be burning through its asset reserves, will exhaust its excess cash by the year 2029. Should this happen -- again, without Congressional action -- only 88% of program costs would be covered. This is a roundabout way of saying that payments to physicians and hospitals that accept Medicare would drop by 12%. That could be a recipe for dropped coverage and substantially smaller networks.
This former presidential candidate might slash your Social Security and Medicare benefits
Clearly, something needs to be done at the Congressional level to resolve Social Security's and Medicare's long-term (75-year) funding gap. But frankly, few people expected this former presidential candidate would suggest that spending cuts to both programs is a viable solution.
A little more than a week ago, Sen. Marco Rubio (R-Fla.), a former presidential candidate in the 2016 election, suggested that benefit cuts to both programs will be needed to work hand-in-hand with tax reforms that are currently working their way through the Republican-led Congress. Said Rubio at a Politico Playbook interview:
I analyze this very differently than most. Many argue that you can't cut taxes because it will drive up the deficit. But we have to do two things. We have to generate economic growth which generates revenue, while reducing spending. That will mean instituting structural changes to Social Security and Medicare for the future.
We don't need to reduce benefits on current retirees or near-term retirees, but we can make changes for future generations, such as mine, and do so in a way that people can prepare for, so the changes will barely be felt.
Full retirement age adjustments are squarely in focus
You'll note the insistence that this is a cut in benefits for future generations and not retirees and pre-retirees. That would probably mean only one thing: a gradual increase in the full retirement age.
Your full retirement age is when the SSA deems you eligible to receive 100% of your retirement benefit. It'll reach its high point in 2022, when folks born in 1960 or later would have to wait until age 67 to receive 100% of their retirement benefit. Republicans have, for some time now, believed that raising the full retirement age to 68, 69, or even 70, would account for increased longevity and require people to either work longer, thus adding more payroll tax revenue into the system, or wait longer, to receive a full payout.
However, what an increase to the full retirement age really does is reduce payouts for future generations. Waiting longer to receive 100% of your retirement benefit means fewer years of receiving a Social Security payout. You would still have the opportunity to claim as early as age 62, but you'd be accepting an even steeper permanent benefit reduction in the process. Either way, it should save the program money over the long run, which is the goal of Rubio and most members of the GOP. Raising the retirement age may be able to completely resolve the funding gaps of both critical social programs.
What's really notable about Rubio's statement
The fact that Rubio is hinting at Social Security reform is nothing new for the Republican Party. They've wanted to institute an increase in the full retirement age for a long time.
The GOP may also be working Social Security reforms into the current tax bill in a roundabout way. A shift away from the Consumer Price Index (CPI) and toward a Chained CPI would open the door for possible cuts to Social Security and/or Medicare in the future. The Chained CPI takes into account substitution bias, or the act of trading down to a cheaper good or service as one becomes too pricey. Since the standard CPI doesn't factor in substitution, the Chained CPI would result in lower inflationary readings, and thusly smaller annual increases in Social Security benefits.
What's really remarkable about Rubio's commentary last week is how direct he was in suggesting that cuts need to be made. Most GOP lawmakers are in favor of subtle reductions to Social Security, like raising the full retirement age or shifting to the Chained CPI -- but few would refer to these changes as direct spending cuts as Rubio has. As President Trump has previously opined, direct cuts to any so-called "entitlement" program won't go over well with the public.
While it remains to be seen if changes to Social Security or Medicare are in the forecast for either program, considering that Trump suggested entitlement changes were off-limits during his campaign, workers have no choice but to take Rubio's comments at face value. In other words, the GOP is looking to cut spending to cover a $1 trillion-plus deficit caused by its proposed tax bill, and both Social Security and Medicare spending for future retirees could be on the chopping block as a result.
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