Social Security and Medicare are overwhelmingly popular programs for older Americans. Due to increased life expectancy, the “Great Resignation,” and the exit of millions of Baby Boomers from the workforce, many are worried whether these programs will be able to cope with our country’s changing demographics. Each program is projected to run low on funds within the next five years.

While I don’t have a crystal ball, my prediction is that Congress may introduce gradual adjustments to each program to ensure continuity of benefits. In this article, I review recent changes to each program and include a few potential adjustments.

Medicare

Last year, Congress passed the Inflation Reduction Act (IRA), a once-in-a-generation change to Medicare Part D, the drug benefit for seniors. Three parts have already started to reduce drug costs for seniors:

• Drug companies will be required to pay rebates if drug prices rise faster than inflation.
• Insulin copays will be limited to $35.
• Limits on cost-sharing for adult vaccines covered under Part D, e.g. the Shingrix™ shingles vaccine.

And there are three more big changes on the way:

1. Starting in 2024, seniors can expect to pay a maximum of $3,300–$3,400 for their medications and won’t face any additional cost after that amount for brand name or generics.
2. Beginning January 1, 2025, an out-of-pocket maximum of $2,000 on Part D drug costs will take effect.
3. Medicare will be allowed to negotiate with pharmaceutical companies on behalf of consumers (begins in 2026 and the list of medications will expand through 2029).

While these changes to Medicare will help seniors afford potentially life-saving medications, it’s unlikely to extend the solvency of the program. The federal government will be forced to make tough decisions on how to fund a program that accounts for 20% of national health-care spending and 12% of the federal budget. Adjustments will involve some combination of the following:

1. Increasing the amount high earners pay for Medicare Part B and Part D.
2. Reducing benefits, coverage, or how much providers are reimbursed (in other words, their fee schedule).
3. Shifting risk to private insurance companies through Medicare Advantage expansion, a replacement of the government’s obligations under Original Medicare.

Social Security

Social Security is facing a massive shortfall. The latest projections show that by 2034, the Social Security trust fund will be depleted. At that point, payroll tax revenue will likely only be sufficient to pay around 80% of scheduled benefits. This is primarily driven by increased life expectancy and the retirement of the Baby Boomer generation.

To extend the solvency of Social Security, Congress will need to make changes to the program. Some proposals include:

1. Gradually increasing the full retirement age beyond 67. This would induce people to work longer before claiming benefits.
2. Increasing payroll taxes on higher earners. Currently Social Security payroll taxes are only applied to the first $160,200 of income. The income cap could be raised or eliminated entirely.
3. Reducing benefits, especially for higher earners. The formula that is used to calculate benefits could be tweaked to pay out less for wealthy retirees.
4. Diverting revenue from other taxes, like a new wealth tax, into the Social Security trust fund.

While all these proposals are politically controversial, some changes will need to be made to prevent an abrupt cut to benefits. It’s likely Congress will implement a mix of small adjustments to benefits, taxes, and the retirement age over the next decade.

While Social Security and Medicare face financial challenges, there are viable policy options to place these vital programs on sound footing for years to come. Neither program is in immediate existential danger, but the sooner Congress enacts changes, the more gradual and less disruptive the implementation can be. If you have questions about your own Medicare situation, please reach out to your Mercer Advisors advisor, who can connect you to an independent, licensed Medicare advisor for complimentary expert advice.