According to the Social Security and Medicare Boards of Trustees’ 2023 reports, Medicare and Social Security now exceed $78 trillion in long-term unfunded obligations. This equates to an obligation of more than $600,000 for every U.S. household. That’s three times all the goods and services produced in the United States last year, as measured by gross domestic product (GDP).

Each year the Social Security and Medicare Boards of Trustees prepare 75-year estimates assessing the programs’ long-term financial conditions. While such long-range estimates are inherently uncertain, these projections provide important information about the direction and magnitude of entitlement spending and revenues. The unfunded obligation represents the amount of money U.S. taxpayers would need to set aside today to cover the deficits Medicare and Social Security will incur over the next 75 years.

Most governmental and media coverage focuses on the trust funds’ health. This is misguided because the Medicare and Social Security trust funds are no such thing. Neither Medicare’s nor Social Security’s trust fund holds any real assets beyond IOUs against future U.S. taxpayers. Special-issue Treasury bonds credited as assets to these trust funds don’t make paying obligations possible. They merely grant Treasury the authority to issue government debt to cover the difference between payroll tax revenues and obligated spending. Instead, this blog will focus on the overall financial burden imposed by excess spending growth from Medicare and Social Security.

Any payroll tax revenues collected in the past were not invested nor saved to pay for future Medicare and Social Security obligations. The money was spent immediately to finance other government objectives. There’s no trust fund to draw down, only a financial ledger to borrow against.

This inconvenient truth inevitably causes consternation among U.S. seniors, who’ve been told that they paid for their Medicare and Social Security benefits. It’s important to confront the truth if we are to make progress on reforming unsustainable entitlement programs into sustainable benefits that keep seniors out of poverty in old age. As it stands, the federal government has promised benefits to millions of Americans that it can’t pay for, creating an uncertain and unsustainable future for those most in need.

So first, let’s make some clarifying corrections to the summary ‘fact’ sheet provided by the U.S. Treasury [my additions in bold]:

• [Medicare’s] Hospital Insurance (HI) Trust Fund, which provides spending authority for Medicare Part A, will be able to is legally authorized to pay 100 percent of total scheduled benefits until 2031 by borrowing from the public to cover benefit costs that exceed payroll tax revenues… At that point, that fund’s reserves will become depleted borrowing authority will be exhausted and continuing program income will be sufficient to pay 89 percent of total scheduled benefits. If Congress fails to act, Medicare hospital benefits will be cut indiscriminately by 11 percent.
• [Social Security’s] Old-Age and Survivors Insurance (OASI) Trust Fund will be able to is legally authorized to pay 100 percent of total scheduled benefits until 2033… At that time, that fund’s reserves will become depleted borrowing authority will be exhausted and continuing program income will be sufficient to pay 77 percent of total scheduled benefits. If Congress fails to act, Social Security benefits will be cut indiscriminately by 23 percent.
• The Supplementary Medical Insurance (SMI) Trust Fund, which provides funding authority for Medicare Parts B and D, is adequately financed into the indefinite future has unlimited borrowing authority because, unlike the other ‘not-really trust funds’, its main financing sources — premiums on enrolled beneficiaries and federal contributions from the Treasurytaxes levied on current and future U.S. taxpayers — are automatically adjusted each year to cover costs for the upcoming year, meaning this program will borrow however much is needed to pay for whatever benefit costs it incurs. Although the financing is assured, Even though the government pretends that the money to finance benefits beyond the premiums paid by beneficiaries grows on trees, the rapidly rising SMI costs have been placing steadily increasing demands place an unsustainable burden on beneficiaries and general current and future U.S. taxpayers.

To sum it up in the words of my Cato colleague Michael Cannon:

“the whole idea of the Social Security and Medicare “trust funds” is a lie. An institutionalized, ritualized lie that the U.S. government tells the American people. One perpetuated by both political parties, as well as others with an interest in hiding the reality of these programs’ unfunded liabilities. One that many journalists uncritically repeat.”

And now, for some actual facts about the burdens posed by unsustainable entitlement promises made by the U.S. government to Medicare and Social Security beneficiaries:

• Medicare (including offsetting receipts from premiums paid by beneficiaries) spent $1.16 trillion in 2022. Medicare spending will more than double over the next 10 years to $2.4 trillion by 2033.
• Social Security (excluding spending on disability benefits) spent $1.07 trillion in 2022. Social Security spending will nearly double to $2.12 trillion by 2033.
• Of the $78.4 trillion in 75-year unfunded obligations for Medicare and Social Security, $48.4 trillion or 60 percent is due to spending on Medicare Parts B and D, which have unlimited borrowing authority to cover deficits – the difference between what beneficiaries pay in premiums and the benefits they receive. Only Medicare Part A is financed through payroll taxes.
• Medicare and Social Security are responsible for 95 percent of total U.S. long-term unfunded obligations.
• Medicare and Social Security already make up a significant share of annual federal deficits. According to the Congressional Budget Office (CBO) Medicare will be responsible for 1.7 percent of GDP in deficits, or one third of the entire 2023 federal deficit of 5.3 percent of GDP. Social Security will be responsible for 0.6 percent of GDP in deficits, or 11 percent of the entire 2023 federal deficit.

Medicare and Social Security are the largest and most popular federal government programs and they are also imposing huge financial and economic burdens on American workers and taxpayers for as long as Congress fails to stop their excessive spending growth. Alternatively, if Congress does nothing, even the most vulnerable Medicare and Social Security beneficiaries would see their benefits drastically cut within the next 10 years.

As the U.S. Treasury, the Congressional Budget Office, the Medicare and Social Security Board of Trustees, and the Government Accountability Office keep stating: Medicare and Social Security spending is unsustainable. Reform is both urgent and necessary.

Congress should establish an independent commission that applies the successful model of the Base Realignment and Closure Commission to enact sensible entitlement reforms before Medicare’s and Social Security’s unsustainable deficit spending triggers a U.S. fiscal crisis in the future. Failure to act soon will hurt the most vulnerable workers and seniors the most, as delay merely postpones the inevitable and eliminates the option to make gradual changes in place of sudden and large benefit cuts and tax increases.