Why Entitlement Reform Is So Hard
The U.S. electorate’s hostility toward serious entitlement reform has a long and consistent track record. Unyielding defense of the status quo has been a winning campaign strategy for decades, and serial efforts to push major changes to Social Security and Medicare onto the national agenda have all sputtered and failed. Both parties have internalized the lesson.
Lawmakers have two means to address the problem: Spend less—through reduced benefits for high earners, more efficient health care, or raising the age of eligibility—or increase revenue through tax hikes. If elected leaders will not restrain spending, then raising taxes is the only option. The Biden administration clearly favors taking a tax-focused path, as do many Republicans (albeit mostly implicitly).
The trustees overseeing Social Security project that the program’s two trust funds will run short of funding on a combined basis in 2035. For Medicare’s hospital insurance (HI) trust fund, depletion is expected in 2028. The impending exhaustion of these trust funds could be the impetus for moving ahead with tax hikes or—if that constraint is pushed aside through various maneuvers and gimmicks—it could be the effect that escalating program expenditures are having on annual federal borrowing and total debt. Either way, the pressure is now building and will not dissipate anytime soon.
A plan relying mainly on higher taxes to keep these popular programs afloat likely would encounter less resistance than one with benefit adjustments. But there are two reasons it would be difficult to get such a plan through Congress. First, the government’s fiscal shortfall is large (and is caused primarily by these programs), so the required tax hikes would be large too, and therefore controversial. Second, the Biden administration’s pledge to shield the middle class from tax hikes rules out one option favored in the past by many Democrats: an increase in the standard payroll tax rate, which has provided most of the financing for these programs since their inceptions. Finding appropriate sources of new revenue outside of the standard payroll tax might be possible, but it would require rethinking some aspects of the programs’ original designs.