As I began to write this, the US Treasury had just announced the publication of the 2025 Social Security and Medicare Trustees reports. The reports unsurprisingly bring more bad news, highlighting James Capretta’s point that “the economic risks are real and rising with each passing year.” The latest reports show that the combined Social Security Old Age and Survivors and Disability Insurance (OASDI) Trust Funds will only be able to pay full benefits until 2034, one year earlier than reported last year. Meanwhile, Medicare Hospital Insurance (also known as Medicare Part A) is projected to pay full benefits only until 2033, which means funds are now expected to run out three years earlier than previously projected.
This dire state of Social Security and Medicare highlights the need for both forums such as these and for a plan of action. I concur with Capretta’s lead essay that “reforms that involve continuity and gradual change” will be far more palatable to policymakers and voters than radical changes. I cannot, however, turn away those “sharp departures” from our present situation. Being familiar with Capretta’s great contributions to the subject of entitlement reform, I’m sure he would agree that “no singular way forward” includes wrestling with the larger ideas and offering “sharp departures” from the status quo when the situation calls for it. We must be alert to opportunities and have the discernment to know when and how to apply and blend those ideas.
Those of us advocating for entitlement reform cannot lose sight of why entitlement reform is important: sound reforms make it easier for Americans to find work, keep their hard-earned money, and remove barriers to quality care.
While it is helpful to focus on what can be feasibly achieved in the realm of policy, we cannot ignore those guiding principles and models. F. A. Hayek wrote that those guiding models will come across as entirely out of reach or unfeasible. Being unable to achieve the ideal policy scenario, however, does not mean we should stop at what can be feasibly achieved. By holding our situation up against our principles and ideal models, we hold ourselves accountable. When we realize we are not living up to those ideas, we are stirred to make what feasible improvements we can to slowly move toward those ideals.
Gradualism in Practice
Capretta’s policy insight shines through here, noting that “sharp departures” from current programs (despite having merit) are more likely to be dismissed and ignored. He offers several notable adjustments to Social Security and Medicare.
He notes that “nothing should be considered off the table.” For Social Security, Capretta suggests tax increases, means testing, and raising the retirement age for future retirees as possible strategies. For Medicare, the more complicated of the two, a workable reform plan could involve tax and premium adjustments on the revenue side, with adjustments to inflation indexing on the spending side.
While these adjustments offer gradual change within the status quo, reformers must be prepared for opposition. Even the most modest changes can come under fire as an attack on retirees. Take, for example, the Medicaid reforms in the “One Big Beautiful Bill” Act to reduce future Medicaid spending to $880 billion by 2035. Michael F. Cannon notes that, if this reduction were successful, “the program’s annual growth rate would merely fall from 4.5 percent to 3 percent.” Despite a mere reduction in growth (in other words, Medicaid spending will continue to grow, albeit at a slower pace), opponents of the spending reduction have come out in full force, opposing the reforms.
Capretta also offers regulatory reforms as a means of improving competition in the health insurance market. He discusses the possibility of standardizing insurance offerings and clinical requirements, and revising rules in Medicare, Medicaid, and the commercial market to encourage consumers to choose lower-priced offerings. These reforms may gain more traction, especially when presented as mechanisms to increase access to care and options for care. One obstacle, however, may be the concentrated interests that benefit from maintaining the status quo. As the logic of collective action shows, those concentrated interests, whether they are insurance companies, healthcare providers, or Medicaid recipients themselves, form a relatively small, motivated, and homogenous group with strong interests in preserving and expanding Medicaid. Those shared goals make organizing easier and reduce the risk of free riding, whereas the broader population of taxpayers has more diffuse and less coordinated interests. Elected officials will cater to these smaller groups’ demands in the hopes that doing so will get them reelected.
No society that sees state-controlled healthcare and interventionism as desirable will embrace sound healthcare reform.
Capretta’s proposed solutions are within reach, but they will still face opposition, especially from those who benefit from the status quo. This is why we cannot abandon those core principles and ideal models.
Another potential fix not mentioned in Capretta’s lead essay would be closing the Medicaid provider tax loophole.
The Medicaid provider tax is used by states to maximize Medicaid spending paid by federal taxpayers. As Brian Blase and Niklas Kleinworth found, state governments use taxes on insurance companies that participate in Medicaid managed care and then use the money raised by provider taxes to claim additional federal reimbursement, which is then returned to those same providers with added supplemental payments.
Now that provider tax reform has been solidified into law and there is a proposed federal rule set to strengthen those restrictions, slowing unsustainable Medicaid spending and broader Medicaid reform feel within reach. To that extent, those reforms must also grapple with the same problems caused by the logic of collective action that I mentioned previously. Once again we must reserve some of our capabilities toward winning the battle of ideas.
The Trust Fund Illusion
In terms of changing those tacit ideas about entitlements, I offer one point of contention with Capretta: we cannot concede the truth regarding the nature of the Social Security and Medicare trust funds. While he wrote in a 2023 article that the trust funds were created to ensure long-term financing, it is necessary to clarify what that assurance entails. That assurance is backed by the promise of tax increases, spending cuts, and taking on additional debt, not any prefunded assets. The federal government admitted so in its FY 2000 financial report:
These balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. … They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury, that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures.
Social Security and Medicare accounts, unlike an Individual Retirement Account or a Health Savings Account, are simply records of tax payments and contain no funds. That assurance is promised through future taxes, debt, and/or cuts to other federal programs.
As my colleague David Rose notes, this does not necessarily make Social Security a Ponzi Scheme, but in some cases, it makes the situation worse than a Ponzi scheme. Rose comments, “Even though a trust fund was built up to deal with this baby boomer problem, it is filled with special securities that must be presented to the Treasury for redemption, which the Treasury can only do by issuing new debt dollar for dollar.” Social Security and Medicare are not voluntary programs (unlike a Ponzi Scheme). Over the lifetime of these programs, politicians eager to secure votes supported changes that increased benefits to current voters at the expense of long-term program viability and broader fiscal solvency.
Many Americans mistakenly picture the money they are paying into these programs through payroll taxes being held in an account tied to their Social Security number. Instead, their payroll taxes are being used to fund benefit payments for today’s retirees, while their benefits will be paid for by future workers, many of whom have yet to be born. When discussing the program’s financing, the American people are at least owed the truth.
What Ideas Will Be Lying Around?
To reform entitlements, we must change hearts and minds. Here, Hayek is again helpful. As he notes in the Constitution of Liberty (and a major focus in The Essential Hayek), the “state of opinion” that determines how policymakers make decisions comes about from ideas that have slowly germinated across society. “New ideas,” Hayek wrote, “start among a few and gradually spread until they become the possession of a majority who know little of their origin.” No society that sees state-controlled healthcare and interventionism as desirable will embrace sound healthcare reform. In Capitalism and Freedom, however, Milton Friedman noted that real change is only produced in the event of a crisis and that change will “depend on the ideas that are lying around.” We will need both the ideal models based in principle as well as the more practical solutions, such as the ones Capretta offers in the lead essay, lying around when the entitlement crisis begins. Ultimately, it will be up to us to discern when and how to apply both types of ideas by remaining vigilant and alert to opportunities.