The national debt will soon reach all-time high share of GDP, due to the growth of spending on Social Security and Medicare. But both Donald Trump and Kamala Harris oppose cutting these programs’ benefits, while neither support tax increases sufficient to avert rising debt.
Tax increases or benefit cuts are typically cited as necessary to avert a fiscal crisis. But this is not strictly true. Federal revenues are in fact projected to expand more than eligibility for entitlements. Rather, exploding entitlement costs, and thus the broader problem of federal deficits and debt, is entirely due to scheduled increases in the generosity of benefits.
The Congressional Budget Office estimates that, under current law, federal spending on just Social Security and Medicare will increase by 2.9% of GDP over the next 30 years, while revenues will rise by only 0.9% of GDP. Coupled with an existing primary deficit of 2.5% of GDP and rising debt interest payments, major reform is necessary.
But it is possible to eliminate the risk of a federal debt crisis without cutting Social Security or Medicare benefits, because the nature of these programs’ cost increases has been widely misunderstood.
Our retirement programs’ finances are supposedly groaning under the demographic double-hit of Baby Boomers retiring and then living 50% longer past retirement than did Social Security’s first cohort of retirees in 1940. On top of that, health care prices have historically risen faster than overall inflation. In fact, existing federal taxes could handle both that demographic burden and healthcare inflation.
In Social Security’s case, what drives its insolvency is ever-increasing benefits that are baked into Social Security’s benefit formula. For instance, a middle-income two-earner couple retiring in 2000 received $43,190 in annual benefits, presented in 2024 dollars adjusted for inflation. That provides an income over 2.3 times the poverty threshold before receiving any pensions from past employers or touching a penny of their own savings. In 2024, a two-earner couple will receive $59,568, or 3.2 times the poverty line. By 2050, such a couple would get $80,836 in 2024 dollars, or 4.3 times the poverty threshold.
To afford these ever-increasing benefits would require the largest peacetime tax hike in history. Or, Congress could simply slow future increases of Social Security benefits to the rate of inflation. Instead of Social Security expanding by 0.8% of GDP, the economy would outgrow the cost of the program, whose share of GDP would decline by 0.1%.
Medicare’s rising costs are often attributed to the retirement of the Baby Boomer demographic bulge boosting the beneficiary rolls, while healthcare inflation drives up the price per beneficiary. But most Baby Boomers are already on the program’s rolls, and the oldest among them will increasingly pass away. Demographics impose a one-time exceptional increase in Medicare costs, which levels out by 2040, and then declines slightly beyond then. Nor does medical inflation account for the problem, because the prices Medicare pays are fixed by law to grow slower than the economy as a whole.
Rather, the projected doubling of Medicare’s cost as a share of GDP is entirely accounted for by the increased use of healthcare services – particularly newly-developed procedures and therapies, which haven’t previously been available. Without this expanded provision of medical services, Medicare’s expenditures would shrink from 3.2% to 2.4% of GDP, rather than increasing to 5.4%.
This is not to say that Medicare should never cover newly developed healthcare services. But which new medical technologies are developed reflects what Medicare promises to pay for. If beneficiaries want to receive additional services which increase the cost of the program, they should pay supplemental premiums to cover the expense.
We are not suggesting that the solution to rising entitlement costs should simply freeze Social Security and Medicare benefits for each retiree. We both favor refocusing social insurance benefits on those in greatest need. But Social Security and Medicare data clearly indicate that saving the federal budget from an explosion of debt does not demand that the government devise a miraculous fix for low birth rates or somehow arrest healthcare inflation. The entitlement funding problem arises merely from the expanded generosity of benefits over time. Congress may deem these additional benefits worth paying for; but Americans should understand where the problem is coming from.
Andrew G. Biggs is a senior fellow at the American Enterprise Institute. Chris Pope is a senior fellow at the Manhattan institute.
