Political Insights from the 2026 Social Security and Medicare Trustees’ Reports

Last week, the Trustees issued their annual Reports on the financial status of the Social Security and Medicare programs, reflecting changes in law, policy, costs, and economic and demographic conditions and assumptions since last year. Media attention was on the exhaustion dates of the relevant Trust Funds (2032 for the retirement and survivors’ portion of Social Security and 2033 for the hospital insurance portion of Medicare) and on the automatic benefit cuts projected to occur then if Congress does not act: 22 percent and 11 percent, respectively. Yet, the reports contain other information that may be just as significant to policymakers and the public. For Social Security, the Trustees significantly reduced the fertility and immigration assumptions, reflecting recent demographic trends and policy changes, and thereby lowering future income and payroll tax revenues. They also incorporated the 2025 tax law, which cut income tax rates and created a temporary extra senior deduction; both directly lowered program revenue from the taxation of benefits. A few other changes were largely offsetting, so in total the long-run actuarial imbalance for the entire program (retirement, survivors, and disability) grew from -3.82 percent of taxable payroll last year to -4.42 percent this year, and from -4.84 percent in year 75 of the projection horizon to -6.57 percent. This matters because it represents the hole that Congress will have to fill, from tax increases and benefit cuts, to achieve long-range solvency in Social Security. As shown in Table 1, the funding gap has more than doubled since President Bush proposed reforming the program in 2005, while the exhaustion date has remained largely steady since 2012. If the fertility assumption were reduced further, from 1.75 in this year’s Report to 1.6, more reflective of recent and expected trends, the actuarial imbalance would grow again, to around -4.8 percent. Table 1 This deterioration may be significant politically. The strategy of some policymakers and advocate has been to delay solving Social Security’s long-known financial problem for as long as possible, wait until insolvency arrives, advertise the large and sudden benefit cuts that would occur then, and force tax increases or further borrowing to avoid them. They are relying on removing the cap on taxable earnings, so that all earnings (above the current $184,500 wage limit) would be taxed at 12.4 percent. Such a massive tax increase, falling even on middle-class households and bad for labor activity, is unlikely, yet it was effective rhetorically and, in the past, could have largely filled the hole. Now, at 2.55 percent of taxable payroll over 75 years and 2.6 percent in the 75th year, this policy would fill only about half of the gap overall and a third in the long run. So, benefits cuts are now clearly on the table. Perhaps this realization will force action and compromise sooner than expected. For Medicare, the Trustees provide current information and projections on all parts of the program, including Part D, the prescription drug benefit. Part D is financed by beneficiary premiums and mainly by state and federal contributions. In 2022, Congress made the drug benefit significantly more generous, completely closing the so-called doughnut hole in coverage and replacing it with a $2,000 annual out-of-pocket cost cap , among other changes. These changes, beginning in 2024 and 2025, raised program costs. By capping premium increases at 6 percent per year, they largely shielded beneficiaries from the large increases that would otherwise have occurred under the law requiring premiums to cover 25.5 percent of costs. The Biden Administration also created a three-year “ demonstration project ”, of dubious legality and without Congressional authorization, that funneled funds to stand-alone Part D plans to keep premium increases low. Yet to contain the budget score for this expansion, Congress imposed a floor, beginning in 2030, requiring premiums to finance 20 percent of program costs going forward. The consequences are shown in Table 2. Table 2 From 2024 to 2026, total drug program expenditures rose from $146 billion to $222 billion, mainly owing to the policy changes but also to the widespread use of new and expensive GLP-1 drugs, while the federal share increased from 76 to 82 percent. The Trustees project further increases, but in 2030, owing to the premium floor, they project a decline in the federal share. The flip side of this drop is a jump in projected monthly premiums, from $46.44 in 2029 to $68.93 in 2030. This is clearly another cramming device: political pressure would build to prevent the large, sudden cost increase on seniors and the disabled, while further increasing the federal budget, deficit, and debt. With the Social Security and Medicare Trust Funds exhausting just after that, Congress may have been too clever by half with this oft-used budgeting technique, and more fundamental structural changes to Medicare benefits and financing will be needed. The post Political Insights from the 2026 Social Security and Medicare Trustees’ Reports appeared first on American Enterprise Institute - AEI .