By Matt McDonald, and Daniel Son,

Even as the growth of our national debt is slowing, we got a reminder last Friday of the long-term challenges we face on entitlements. The latest Social Security and Medicare Trustees report projects the programs to become insolvent in 2033 and 2026, respectively.

No one in Washington would argue that fixing the programs is politically easy, yet aside from the political risk of attempting to reform entitlements, there is another problem: the primary policy proposals to date (tax hikes or spending cuts) only fix part of the problem because they don’t address how these programs are truly funded.

It is important to understand these programs in part as an intergenerational wealth transfer:

  • The workers of today pay for the retirees of today
  • When the workers of today retire, they are counting on the workers of tomorrow to pay for them

There is nothing to preclude this funding mechanism from working into the future. The problem is the benefit formula is not truly aligned with this funding mechanism. Because of this disconnect, when we experience demographic changes (e.g., longevity, declining birthrates) the programs find themselves unable to keep the promises they’ve made with the current funding structure. In this paper, we take a look at what could actually align the funding mechanism with the benefit formula.

If we want to stop revisiting our entitlement problems, we need to more closely align the benefits we receive from the programs with how they are actually funded. If we don’t, we are likely to bounce from one fix to another as societal trends change. One fix might work for 10 years, another might work for 50, but a permanent solution has to more effectively match funding mechanisms with benefit formulas, much like private pensions do. Without a match between the funding and the promise, neither are really guaranteed.

Matt McDonald is a partner at Hamilton Place Strategies and a veteran of three Presidential campaigns and the White House. Prior to joining HPS, Matt worked for McKinsey and Company. He holds an MBA from MIT’s Sloan School of Management and a degree in economics from Dartmouth College.
Daniel Son is a director at Hamilton Place Strategies and a veteran of Capitol Hill. He worked for nearly five years in the House of Representatives for multiple Members of Congress, and led communications efforts dealing with historic legislative action, like healthcare reform, Dodd-Frank reform, and the federal budget. Daniel graduated from James Madison University and is currently an MBA candidate at the University of Maryland’s Smith School of Business. – The Missing Piece of Entitlement Reform by Hamilton Place Strategies