During the raucous debate surrounding the GOP-sponsored reconciliation bill, the trustees for Social Security and Medicare rather quietly released their annual reports on the status of the programs’ respective trust funds. Their projections once again show that it will not be easy to stabilize the fiscal outlook without closing the widening gap between how much is spent on these entitlement programs compared to the dedicated taxes and premiums collected to pay for them.
The core problem is a transformative demographic shift that was not anticipated when the programs were established. In 1935, when Congress approved the original Social Security law, and again in 1965, when Medicare was created, the expectation was that birth rates would remain close to their historical levels. That proved to be a costly misjudgment as family sizes began to fall sharply starting in the early 1960s and then continued to decline in the succeeding decades.
Further, while there was an expectation of improvement in average lifespans, the progress has been more rapid than anticipated.
Finally, with Medicare and Medicaid providing insurance coverage starting in the 1960s, demand for services rose precipitously, as did the prices charged by hospitals and doctors. With few exceptions, annual spending on health care has been rising more rapidly than incomes for most of the last half-century.
The combination of fewer workers, longer lives for retirees, and high inflation in the health sector has placed immense stress on the Social Security and Medicare Hospital Insurance (HI) trust funds, which are financed on a pay-as-you-go basis.
Three charts tell the story.
Figure 1 shows the drop in the U.S.’s total fertility rate (TFR) since the 1960s. The 2025 Social Security trustees report projects a modest increase in the TFR in the coming decades relative to recent experience. In 2023, the TFR was 1.62 but the trustees expect a return to 1.90 by 2045. If that assumption proves to be too optimistic, restoring the program to solvency will be even more challenging than is already expected to be the case.
The fall in birth rates combined with improvements in lifespans has pushed the average age of the total US population higher, and that trend is expected to continue, as reflected in Figure 2. In 1950, the population aged 65 and older was just 8.8 percent of the total population. A century later, in 2050, it is expected to be nearly 21.7 percent.
When Social Security and Medicare were enacted, Congress created trust funds to ensure program spending was largely paid for from dedicated payroll taxes and Medicare premiums. An exception was made for Medicare’s Supplementary Medical Insurance (SMI) trust fund, which was to be financed partly from beneficiary premiums and partly from an annual transfer from the general fund of the Treasury. The original split was 50-50. However, as costs soared in the program’s early years, beneficiary premiums were reduced relative to total costs and now cover only 25 percent of program spending. The gap between SMI premiums and expenditures, along with the expected shortfalls in Social Security and Medicare HI, are the primary sources of today’s deteriorating fiscal outlook.
As shown in Figure 3, up until about two decades ago, total spending on these programs was roughly in line with total receipts. However, in 2025, the excess of spending over receipts is expected to be 2.7 percent of GDP, and by 2050 the gap is projected to widen to 4.7 percent of GDP.
And this might be the optimistic scenario. In addition to a seemingly rosy expectation for birth rates, the Medicare report continues to assume deep future cuts in payment rates for hospitals and physicians. For instance, under current law, Medicare’s payments for inpatient hospital services are supposed to be restrained based on an assumption of an annual improvement in productivity of 1.0 percent (which the expected average across the entire economy). But actual data shows only a 0.4 percent annual productivity increase in the hospital sector. The difference may force Congress to revisit what it pays for services in future years, and thus further increase Medicare spending. A similar adjustment might also affect physician fees. The program’s trustees project these potential modifications could increase Medicare spending in 2070 by an additional 17 percent.
The recent debate over the GOP’s budget reconciliation bill was focused on many important tax and spending changes, but it steered clear of the core fiscal challenge, which is how to close growing gap between income and outgo for Social Security and Medicare. The longer Congress waits to take up reform of these programs, the more challenging it will be for both parties to pursue other objectives, such as an improvement in defense readiness or expanded social welfare support for low-income households.
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