Social Security, Medicare Funding Outlook Worsens

Good Wednesday evening. The outlook for the Social Security and Medicare trust funds has gotten worse, the programs trustees said in annual reports released today. We've got details on that and more.

Social Security, Medicare Funding Outlook Worsens

The combined Social Security trust funds are expected to be depleted by 2034, one year earlier that projected a year ago, according to a new report from the program's trustees. At that time, the funds would be able to cover just 81% of obligations.

Social Security's two trust funds, the Old-Age and Survivors Insurance Trust Fund that helps cover the cost of Social Security retirement benefits and the Disability Insurance Trust Fund, are separate and combining them would require a change in the law. But the combination is often used as a basis for measuring the health of the program.

Separately, the Old-Age and Survivors Insurance Trust Fund is projected to be depleted in 2033, the same as last year, according to the trustees' report. Incoming revenues from payroll taxes would cover only 77% of obligations in 2033, forcing automatic benefit cuts of 23% unless Congress acts to shore up the program.

The trustees said the separate Disability Insurance Trust Fund will last until 2099, a year longer than previously expected.

Medicare projections moved up: The trustees' report moves up the depletion date for the Hospital Insurance Trust Fund, known as Medicare Part A. That fund is now projected to be depleted in 2033, three years earlier than previously estimated. At that time, the program will be able to cover 89% of scheduled benefits.

Medicare's Supplementary Medical Insurance Trust Fund does not face the same problem, though, since its primary funding sources — premium payments and federal contributions — are adjusted annually. At the same time, the trustees noted that "rapidly rising SMI costs have been placing steadily increasing demands on beneficiaries and general taxpayers."

What's driving the change in the outlook: The faster-than-previously-expected drawdown on the combined Social Security funds was driven largely by a change in the rules expanding eligibility for railroad workers and public pension beneficiaries that took effect this year under the Social Security Fairness Act, signed into law in early January by President Joe Biden. Adjustments to the assumptions about fertility rates and a downward revision in the estimated labor share of economic output also contributed to the revision, the trustees said.

The decline in the outlook for the Medicare hospital fund was driven by higher-than-expected costs in the near term. These higher costs raised the baseline and the cost estimates for all future years.

The bottom line: "Lawmakers have many options for changes that would reduce or eliminate the long-term financing shortfalls," the trustees wrote. "Taking action sooner rather than later will allow consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare."

Senate GOP's Megabill Faces Pushback From Republicans

The Senate version of Republicans' budget reconciliation bill has drawn some stiff pushback from GOP lawmakers this week, raising concerns that the party may not be able to meet its self-imposed July 4 deadline for getting the bill to President Trump's desk.

The Senate Finance Committee released its portion of the package on Monday, including changes to some extremely thorny elements of the House plan. Now, some senators and House members are raising alarms over the Senate approach to Medicaid cuts, clean energy tax credits, deficit reduction and the cap on the state and local tax deduction.

"My main takeaway for you guys is this bill, as the Senate has produced it, is definitely dead if it were to come over to the House in anything resembling its current form," Rep. Chip Roy, a member of the conservative House Freedom Caucus, reportedly said on a call with reporters.

Moderate House Republicans were reportedly surprised that the Senate bill would more sharply curb state taxes on medical providers. States have used those taxes to boost the federal Medicaid matching funds they receive, and they then send those funds back to hospitals via higher reimbursements.

Critics have sought to crack down on what they see as a costly gaming of the system. Under the Senate plan, the 40 states that have expanded Medicaid under the Affordable Care Act would see their so-called provider taxes cut from as high as 6% to 3.5% by 2031.

That change has alarmed hospital leaders — and their lobbyists — and upset some Republicans in both the Senate and the House, who are reportedly working to strip the change from the final package. Speaker Mike Johnson reportedly was not told about the change and Punchbowl News says that House Republican leaders don't believe it could pass their chamber.

Other elements of the Senate proposal are also drawing notable pushback.

• Fiscal hawks complain that the plan still doesn't do enough to cut spending.
• Blue-state moderates warned against changing the $40,000 cap on state and local tax deductions that they negotiated in the House plan, but the Senate version of the legislation included a $10,000 cap as a placeholder for further discussions. If the GOP reconciliation bill fails, the cap would be eliminated as of 2026, so Republican Rep. Nick LaLota told The Hill that the Senate now has a choice: "It's either $40,000 or unlimited, because anything less than $40,000 will crash the bill and SALT will come back as unlimited next year."
• House conservatives, meanwhile, are angry about the Senate's more flexible approach to rolling back clean energy tax credits. Members of the House Freedom Caucus had warned earlier this month that "if the Senate attempts to water down, strip out, or walk back the hard-fought spending reductions and IRA Green New Scam rollbacks achieved in this legislation, we will not accept it."

The bottom line: Republicans continue to work out details of their bill, but Majority Leader John Thune said Wednesday that he still hopes to have the Senate take up the bill by the middle of next week and the White House is sticking to the July 4 deadline.

Number of the Day: $3.9 Trillion

The tax legislation in the Senate Finance Committee's reconciliation bill would reduce revenue by $3.9 trillion over 10 years, according to modeling released Wednesday by the conservative-leaning Tax Foundation. That "dynamic" modeling factors in economic feedback effects from a projected 1.1% increase in long-run GDP. Without those effects, the major tax provisions modeled would lower federal revenues by $4.8 trillion between 2025 and 2034.

Quote of the Day

"I may do it, I may not do it. I mean, nobody knows what I'm going to do."

– President Donald Trump, perhaps leaning into the madman theory of politics, after a reporter outside the White House asked him Wednesday morning whether he's preparing to order a strike against Iranian nuclear facilities. He added: "I can tell you this, that Iran's got a lot of trouble. And they want to negotiate. And I say why didn't you negotiate with me before all this death and destruction."

Trump has called for an "unconditional surrender" by Iran, but Iranian Supreme Leader Ayatollah Ali Khamenei rejected that demand in a televised speech in which he also warned of "irreparable damage" if the United States takes military action against his country. Trump's response: "I say, good luck."

The Wall Street Journal reports that Trump told senior aides yesterday that he approved attack plans against Iran but was waiting to see if Tehran would give up its nuclear program.

Fed Defies Trump Call for Rate Cuts, Holds Steady in 'Solid' Economy

As widely expected, the Federal Reserve held steady on interest rates Wednesday and maintained its projections for two rate cuts later in the year. The decision by the Federal Open Market Committee holds rates on the central bank's key borrowing rates in a range between 4.25% and 4.5%.

The committee's assessment of current economic conditions remained largely the same, with the economy continuing to expand at a "solid pace" amid low unemployment and a basically healthy labor market. Inflation remains "somewhat elevated."

At the same time, the outlook for later this year and next has changed. While uncertainty "has diminished," it "remains elevated," Fed officials said. Expectations for higher inflation in the near term have risen, while expectations for growth have moved lower. Accordingly, estimates for 2026 suggest that the central bank will be less aggressive with cut rates next year than previously projected.

Powell warns on inflation: Saying the economy has defied expectations that it would weaken, Federal Reserve Chair Jerome Powell told reporters that the central bank is "well positioned to wait" on any interest rate changes, with officials waiting to see how things play out. "There are many, many different scenarios ... where inflation does or doesn't prove out to be at the levels we think, where the labor market does or doesn't soften," he said at a press conference following the release of the rate decision.

Powell also reiterated his view that the Trump administration's trade policy will inevitably result in higher prices. "Everyone that I know is forecasting a meaningful increase in inflation in coming months from tariffs because someone has to pay for the tariffs," Powell said. In a struggle between manufacturers, exporters, importers and retailers, "people will be trying not to be the ones who can take up the cost, but ultimately the cost of the tariff has to be paid. And some of it will fall on the end consumer."

Torsten Slok of Apollo Global Management told Bloomberg News that the Fed appears to be more worried about stagflation, marked by a slowing economy and rising inflation. "Someone needs to pay the tax on imports," Slok said, echoing Powell. If consumers pay, that means higher prices and lower growth. If companies eat the tariffs, then the result will be lower profits and a likely decline in employment and investment.

Heather Long, chief economist at Navy Federal Credit Union, agreed. "The Federal Reserve is forecasting stagflation in 2025," she wrote. "It's nowhere near 1970s style stagflation, but this 'mini stagflation' would still be uncomfortable - even painful - for many Americans."

Trump calls for cuts: Earlier Wednesday, President Trump told reporters at the White House that he wants the Fed to slash rates immediately to boost economic growth.

"We should be two points lower, it would be nice to be two-and-a-half points lower," Trump said. "Am I allowed to appoint myself at the Fed? I'd do a much better job than these people."

Trump also continued his campaign of insults against the Fed chief. "We have a stupid person, frankly, at the Fed," he said. "I'm nasty. I'm nice. Nothing works."

Fiscal News Roundup

• Medicare and Social Security Go-Broke Dates Pushed Up Due to Rising Health Care Costs, New SSA Law – Associated Press
• Senate GOP’s Medicaid Cuts Mean New Trouble for Trump Megabill – Wall Street Journal
• The Senate Wants Billions More in Medicaid Cuts, Pinching States and Infuriating Hospitals – New York Times
• Senate’s ‘Big, Beautiful Bill’ Faces House Headwinds: ‘This Is Political Stupidity’ – The Hill
• Senate Bill’s Medicaid Cuts Draw Some GOP Angst – The Hill
• Senate Leadership Ponders Rural Hospital Fund to Sway Megabill Holdouts – Politico
• House Republican Says Senate Bill’s Green Energy Reforms ‘Fail to Meet the Moment’ – Politico
• Federal Reserve Leaves Its Key Rate Unchanged but Sees Two Cuts This Year – Associated Press
• Trump Rips Powell, Suggests Appointing Himself to Fed – The Hill
• Senate Republicans Double Down and Target Clean Energy in Draft Tax Bill – Associated Press
• More Employers Are Sending Workers Shopping for Their Own Health Coverage – Associated Press
• Purdue Pharma’s $7B Opioid Settlement Could Advance Soon After States Back It – Associated Press
• Nippon Steel Finalizes $15B Takeover of US Steel After Sealing National Security Agreement – Associated Press

Views and Analysis

• How Trump’s Top Economist Envisions Victory in the Trade War – Victoria Guida, Politico
• The Fed Is Just as Confused as the Rest of Us – Jonthan Levin, Bloomberg
• The GOP Budget Bill Is Most Popular With This Group – Philip Bump, Washington Post
• Senate Bill Gives Giant Tax Break to Big Oil – David Dayen, American Prospect
• Lawyers Are Mad About SALT – Matt Levine, Bloomberg
• The Path to Record Deficits – Richard Rubin, Anthony DeBarros and Rosie Ettenheim, Wall Street Journal
• The GOP Tax-Bill Endgame – Kimberly A. Strassel, Wall Street Journal
• Trump Is Finally Building His Wall. We’ll All Suffer the Consequences – Catherine Rampell, Washington Post
• Kennedy’s Purge Is a ‘Code Red’ for Vaccines in America – David Wallace-Wells, New York Times
• Two Cheers for the Senate Tax Bill – Wall Street Journal Editorial Board