On Monday, the Social Security and Medicare Trustees issued their annual reports on the fiscal status of these two enormous entitlement programs. TL;DR? The prognosis isn’t promising – both programs are currently paying out more than they are taking in, meaning they may be unable to provide full benefits within the next thirteen years.

Understanding why the balance sheet is upside down isn’t difficult. With the Baby Boomer Generation now largely retired, there are fewer workers contributing to the programs compared to the number of beneficiaries. And the situation is getting worse. Consider Social Security: Between 1974-2008, Social Security had between 3.2 to 3.4 workers for every beneficiary. However, since 2008, this ratio has steadily declined to 2.7 workers per beneficiary in 2023, with projections indicating further decline.

In 2023, the total cost of Social Security amounted to $1,392 billion, while total income stood at $1,351 billion. While a $41 billion difference might not initially seem significant, it’s important to recognize that $67 billion of the income consisted of interest earnings on reserves. These reserves dwindled from $2,830 billion at the beginning of 2023 to $2,788 billion by the end of the year. Looking ahead, the trustees estimate that reserves will plummet to just $551 billion by the end of 2033. Reserves will be completely depleted in 2035, necessitating benefit cuts of roughly 20 percent.

In other words, absent some intervention such as a payroll tax increase (either in rate or taxable amount), benefit reduction, or retirement age adjustment, cuts to the program are inevitable. Moreover, the longer it takes to implement these adjustments, the more drastic they will need to be. Therefore, policymakers advocating for no changes to Social Security are essentially endorsing cuts in roughly 10 years’ time.

This is why we have argued for a fiscal commission to identify changes that can alter the nation’s fiscal trajectory. This commission should not only address Social Security but also revenue generation, the budget process, and spending across-the-board.

Speaking of spending, the Trustees also reported on another major entitlement program, Medicare. Consisting of the Hospital Insurance trust fund (HI) and the Supplementary Medical Insurance trust fund (SMI). In 2023, Medicare faced expenditures of $1,037 billion in 2023, with income totaling $1,025 billion, including $10 billion in interest earnings. While HI experienced a surplus of $12.2 billion in 2023, deficits are expected to begin in 2029, leading to depletion of the trust fund by 2036. This is partly due to projected expenditure growth of 5.8 percent over the next five years, outpacing income growth of 5.5 percent. And when you’re talking billions over extended period that compounded 0.3 percent becomes a lot.

HI is primarily financed through payroll taxes, while SMI mostly relies on premiums and federal government contributions. Nonetheless, they are closely intertwined. And since the federal government is not going to let this program go bust, it is important to look at its cost growth over time. Medicare expenditures represented 3.8 percent of GDP in 2023, with projections indicating a rise to 5.8 percent of GDP by 2048, largely driven by beneficiary growth.

Policymakers often focus on annual deficits contributing to the $34.6 trillion debt, but considering the long-term liabilities of Social Security and Medicare – as any Certified Public Account would – paints an even grimmer fiscal picture. It’s high time to confront these realities. Establishing a bipartisan, bicameral fiscal commission to review policy proposals and make tough recommendations can compel policymakers to take the necessary steps to put the country on a sound fiscal path.