America’s Entitlement Illusion

Most Americans are well aware that living in debt — consuming beyond what one can afford — without a sustainable budget plan is haphazard; those who do so are often deemed to lack foresight. Collectively, Americans carry roughly $18.8 trillion in household debt. America’s national debt, meanwhile, is more than double that amount.

The amount owed by the U.S. government exceeds $290,000 per household. There was a brief period between 1998 and 2001 that the federal budget was technically balanced. Now, running trillion-dollar deficits, the federal government abandoned the goal of returning to a balanced federal budget. In fact, to achieve a balanced budget a decade from now, programs would have to be cut by 36% — an inconceivable endeavor. The two major entitlement programs that are already largely responsible for budget deficits — Social Security and Medicare — already account for 37% of all federal spending, costing the equivalent of more than $12,300 and $7,800 per household, respectively. However, a more difficult dilemma is looming over Washington.

The 2026 Social Security and Medicare Trustees Reports, released in June, reiterated what fiscal policy experts outside government have long warned about: The retirement trust fund for Social Security is running out of funds. While Social Security’s insolvency date is late 2032, Medicare’s Hospital Insurance trust fund will follow in 2033. After those dates, incoming revenue would cover only 78% and 89% of scheduled benefits, respectively.

In just over six years, if Congress fails to act, millions of American seniors will face abrupt reductions in the benefits on which they rely — 22% for Social Security and 11% for Medicare Part A — as the programs’ respective trust funds are exhausted. But what lawmakers may resort to to avoid public excoriation could be worse still. Congress could authorize transfers from general revenues to preserve the entitlement benefits, pushing America’s already debt-burdened economy deeper into a fiscal quagmire. A debt burden exceeding 175% of GDP becomes the destination the American economy is projected to reach in 30 years under that scenario.

More than 70 million Americans receive Social Security benefits and roughly as many are enrolled in Medicare; meanwhile working adults finance these programs today on the promise of receiving those benefits in the future. Virtually every American will bear the consequences of the government’s failure to confront entitlement insolvency.

In a politically unimpeded world, Congress would best respond to the entitlements’ structurally imbalanced financing model by discontinuing it altogether; free markets would then supply retirement security for Americans, not government-run entitlements. The federal government should initiate a decade-long transition away from the current Social Security and Medicare systems, perhaps preserving a means-tested minimum level of government assistance through vouchers. Americans would be able to direct their earnings currently taken through payroll taxes toward personal savings accounts and market investments they believe would best provide for their retirement. Seniors would likewise be able to use their savings to purchase private health insurance and pay directly for routine care. Vouchers would help finance healthcare for poor and seriously ill seniors, while the government would allow younger Americans to save for their future medical needs through health savings accounts.

Still, even in a world bound by American politics, Andrew Biggs and James Capretta of the American Enterprise Institute, among others, offer common-sense reforms to repair the broken entitlement model before trust-fund depletion.

Social Security and Medicare benefits extend far beyond protection against poverty in old age, providing benefits without means-testing eligibility. Biggs’s proposals aim to make Social Security’s benefit model more “effective as a social insurance program protecting low lifetime wage earners against a meager retirement.” Capretta proposes introducing market discipline into Medicare and capping federal support to slow cost growth through mechanisms such as premium support, which would ensure an affordable basic level of coverage for seniors but limit open-ended federal commitments.

Whatever form it takes, a reduction in benefit spending — beginning, at least, with a reduction in its rate of growth — is imperative to restore the programs’ long-term sustainability. The claim that entitlement insolvency can be solved by raising taxes alone is illusory. If the federal government confiscated all $8.4 trillion in wealth held by U.S. billionaires, the proceeds would cover Social Security and Medicare outlays for about the next two and a half years.

Authorizing general-revenue transfers to maintain Social Security and Medicare benefits is a dire alternative. Measured in today’s dollars, paying these programs as scheduled over the next 75 years would require the government to close a $97.2 trillion gap beyond the programs’ dedicated revenues — equivalent to about 5.2% of projected GDP each year over those 75 years. This alternative becomes grimmer still when borrowing costs are included. In nominal terms, Jessica Riedl estimates that the combined Social Security and Medicare shortfall over the next 30 years would reach $157.1 trillion, of which $73.7 trillion would come from interest costs alone as the federal government borrows to cover the gap.

That is money spent not on retirees or medical care, but on servicing debt. Such a burden on future taxpayers would be unfathomable. Entitlement reform is imperative.

Vladlena Klymova is a policy analyst at the Taxpayers Protection Alliance.

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