Sharing the Pain of Social Security and Medicare Reform

In combination with current trends in health costs, adjustments now scheduled for Social Security, Medicare and the income tax are likely to offset virtually all of the increase in Social Security cash benefits that future economic growth would otherwise produce. Current law will reduce future Social Security benefits in two ways, through the increase in the normal retirement and the expansion of the fraction of benefits included in the personal income tax base. Medicare projections suggest that beneficiaries also will have to devote an increasing fraction of their remaining benefit income to paying out-of-pocket health expenses and Medicare premiums and deductibles. Under current projections, the net earnings of future workers (their earnings after paying income and payroll taxes) will grow much more rapidly than the net benefits (Social Security benefits net of health costs) of retirees. The gap between the prospects of future workers and the prospects of future retirees is large enough that the current Medicare and Social Security financing problems could be addressed entirely through increases in taxes on future workers, without disadvantaging future workers relative to future beneficiaries. Indeed, the gap appears large enough also to allow the addition of a modest prescription drug benefit to Medicare. Restoring fiscal balance to Social Security and Medicare through higher taxes on future workers also does not appear to create intergenerational equity problems. The intergenerational transfers that current children can expect to receive from their parents within the confines of a typical family would still exceed the burden of the payroll tax payments flowing from these children back to their parents over the balance of their work careers.