Millions of Americans depend on Social Security and Medicare, but both programs are facing financial challenges. Over the next 75 years, the Hospital Insurance trust fund (i.e., the source of Medicare Part A benefits) and the combined Old-Age, Survivors, and Disability Insurance trust funds (i.e., the source of Social Security benefits) are expected to run deficits of $4.4 trillion and $22.4 trillion, respectively.

The Social Security and Medicare trust funds are trending toward insolvency

The funding problems that threaten Social Security and Medicare can be ascribed to the aging population. The combination of soaring birth rates during the baby boom and lower birth rates in subsequent years has reduced the ratio of taxpaying workers to beneficiaries. In other words, the number of Social Security and Medicare beneficiaries is growing more quickly than the number of workers who pay taxes to support those programs.

So what? According to the trustees, the Medicare trust fund will be insolvent by 2031, at which point revenue from payroll taxes would cover just 89% of projected costs. Similarly, the Social Security trust fund is on pace to be insolvent by 2034, at which point revenue from payroll taxes would cover just 80% of scheduled benefits. If Congress fails to find a solution before the trust funds are depleted, benefit cuts will occur automatically.

Here's what President Joe Biden and House Speaker Kevin McCarthy (R-CA) have to say about the future of Social Security and Medicare.

Two people sit at a table while drinking coffee and looking at a computer.

Image source: Getty Images.

President Biden and House Speaker McCarthy oppose benefit cuts

Differences in political ideology often lead to gridlock in Washington, but President Biden and House Speaker McCarthy have at least one thing in common: Both politicians have voiced their opposition to benefit cuts. McCarthy told CBS that Social Security and Medicare benefit cuts were "off the table" during an interview in January, and President Biden promised he would "not cut a single Social Security or Medicare benefit" during his State of the Union address days later.

Biden actually went one step further. His proposed budget for fiscal 2024 would extend Medicare solvency by 25 years, primarily by increasing taxes on high earners (i.e., individuals with annual income exceeding $400,000), without benefit cuts. But Biden's budget doesn't tackle Social Security, which hints at the scope and complexity of the problem.

As mentioned, Social Security faces a funding shortfall of $22.4 trillion over the next 75 years -- five times the funding shortfall the Medicare program is facing -- and keeping the Social Security trust fund solvent will almost certainly require benefit cuts. But no politician wants to say that for fear of alienating voters and damaging their reputation. Indeed, Social Security is often referred to as the "third rail" of politics -- a reference to the high-voltage rail that powers certain trains and subway cars -- because touching the topic can have lethal consequences for politicians.

History says Social Security benefit cuts may be necessary

Social Security accounted for 19.5% of federal spending in 2022, and that figure is projected to hit 24% by 2033, according to the Congressional Budget Office. That trend is unsustainable. Lawmakers must find a solution, and history says that solution will involve benefit cuts.

Consider the events of 1983: The Social Security trust fund was on the brink of insolvency when Congress implemented sweeping changes with bipartisan support. Among other measures, the Social Security Amendments of 1983 allowed the federal government to tax benefits, and the legislation gradually raised the full retirement age from 65 to 67. Those changes effectively cut benefits, and Biden was one of the senators who voted in favor of the bill.

The next big change came a decade later. The Omnibus Budget Reconciliation Act of 1993 extended the federal government's ability to tax Social Security by adding a second income threshold. Similar to the amendments of 1983, this legislation effectively cut benefits and Biden was one of the senators who supported it.

Here's the bottom line: President Biden has outlined a plan to extend Medicare solvency without benefit cuts, and I have no doubt that he would also like to avoid Social Security cuts. I believe Biden and McCarthy would be thrilled if Democrats and Republicans could find an acceptable solution that left Social Security benefits intact. But history says that outcome is unlikely.

However, current beneficiaries have no cause for alarm just yet. Future benefit cuts could take many different forms, and the burden would likely be skewed toward future beneficiaries.