There has been a certain amount of educated speculation about the effect of COVID-19 on the Social Security and Medicare systems. The 2020 OASDI Trustees Report, which was prepared before the pandemic gained a foothold and showed financial results through 2019, projected an exhaust date of 2035 for the combined OAS and DI funds. In April, Alicia Munnell of the Center for Retirement Research at Boston College issued a brief saying that if the COVID-19 economic collapse causes payroll taxes to drop by, say, 20% for two years, the depletion date would move up by about two years, to 2033.The latest weigh-in has come from the Congressional Budget Office (CBO). Its September 2020 report, CBO Outlook for Major Federal Trust Funds 2020 to 2030, projects the following exhaust dates:
- Medicare HI Trust Fund (pays benefits under Part A): 2024
- Social Security Disability (DI) Trust Fund: 2026
- Social Security Old Age and Survivors Insurance (OASI) Trust Fund: 2031
The CBO report also explained how trust fund financing works. It’s basically an accounting mechanism to link earmarked receipts (that is, money dedicated to a specific purpose) with corresponding expenditures. Retirement, survivor, and disability benefits, for example, are paid out of the 12.4% payroll tax collected from employees and employers. Medicare Part A benefits are paid out of the 2.9% Medicare tax as well as the additional 0.9% paid by couples with income over $250,000 and individuals with income over $200,000. When the receipts from these taxes exceed the amount that needs to be paid out, the overage is held in the respective trust fund and invested in special-issue Treasury securities.
It should be noted that when Congress and the president are planning their spending, they use the unified budget perspective. Rather than attaching an expenditure to the earmarked receipts (e.g., payroll taxes), the expenditures are based on the underlying authorizing laws. Both Social Security and Medicare are mandatory expenditures, making up about 60% of the total federal budget. This means they are protected from the appropriations process. The only way these expenditures can be reduced is to change the authorizing laws, which requires a 60-vote majority in the Senate.
If the trust funds were to run dry, the United States would still be obligated to pay Social Security and Medicare benefits. The trustees, in their annual reports, generally say that when the trust funds run out, payroll taxes will be sufficient to pay X% of benefits (depending on which trust fund they are talking about). But the Social Security Act of 1935, as amended, requires benefits to be paid. There would be a conflict between two federal laws. Since we’ve never been in this situation, it’s impossible to know how it would be resolved.