Social Security, Medicare abyss

A key reason we have a problem with entitlement programs like Social Security is they were enacted with insufficient regard to their long-term finances.

For example, Congress’ only concern about the recently enacted Medicare drug benefit was if it would cost less than $400 billion in the first 10 years. The period afterward was almost completely ignored in congressional debate.

This myopia makes it too easy to enact new programs with little short-run costs but massive long-run expenses. In the case of the drug benefit, the first two years’ costs were virtually nil and then are phased in for several more. It is only in the last years of the initial forecast period that the long-term spending trend becomes visible. At that point, the drug benefit will cost taxpayers more than $100 billion yearly, according to the Congressional Budget Office.

Once a year, however, we get a look at the government’s largest long-term financial liabilities when trustees of the Social Security and Medicare systems issue their annual reports. The prose may be impenetrable, but it makes for interesting reading if one knows where to look.

Last year, the actuaries, who actually write the trustees reports, made an important methodological change. Historically, they presented financial data for 75 years out. But some trustees felt it would be more informative if perpetual costs could be summarized in present value terms. (A present value calculation takes into account that $1 in the future is worth less than $1 today, even with no inflation.) These figures have become the most revealing indicators of the true financial condition of our major entitlement programs.

Starting with Social Security, which President Bush repeatedly says is in precarious financial condition, we see the present value of all the program’s future costs minus expected taxes in perpetuity is estimated at $13.7 trillion. The $1.7 trillion now in the Social Security trust fund is treated as a real asset, which lowers the unfunded liability to $12 trillion.

Because those who do not yet qualify for Social Security benefits will get back less than they will pay in present-value terms, it lowers the long-term cost by another $900 billion, for a net unfunded liability of $11.1 trillion — $12.8 trillion if you don’t believe there are really any assets in the trust fund. (These data are in Table IV.B7 of the Annual Report of the Boards of Trustees of the Federal Hospital Insurance Trust and Federal Supplementary Medical Insurance Trust Funds, on the Web at: www.cms.hhs.gov/publications/ trusteesreport/tr2005.pdf.)

In short, we would need about one year’s gross domestic product in a bond fund somewhere, backed by productive tangible assets earning a real return to pay all Social Security promises without raising taxes or cutting benefits.

However, this pales in comparison to Medicare’s problems. According to its trustees, Part A, which pays for hospital care, has an unfunded liability of $9.4 trillion for current participants and $14.7 trillion for future participants, a total of $24.1 trillion (Table III.B11).

Medicare Part B, which pays for doctors’ visits, will require $25.8 trillion in funds from taxpayers to pay for promised benefits over and above the modest premiums retirees pay (Table III.C15). And the new Medicare Part D, which pays for prescription drugs, will need $18.2 trillion from taxpayers on top of beneficiary premiums and state transfers (Table III.C21).

Adding up all of Medicare’s unfunded costs yields a total of $68.1 trillion — sixfold Social Security’s unfunded liability, which President Bush says is in crisis and requires immediate repair. Indeed, the drug benefit alone, which he rammed through Congress two years ago, has a liability $7.1 trillion greater than Social Security. This suggests we could repeal the drug benefit, fund Social Security forever with no tax increases or benefit cuts, and still cut $7.1 trillion off our national debt.

To make these very large numbers more concrete, Social Security’s unfunded liability comes to 1.2 percent of gross domestic product in perpetuity (1.4 percent without the trust fund) — about what now is raised by the corporate income tax. The comparable number for Medicare is 7.1 percent — about what is raised by the individual income tax. And remember these figures are for the unfunded portion of these programs, so they are over and above payroll taxes.

The chilling conclusion is that virtually all federal taxes, on a present-value basis, do nothing but pay for Social Security and Medicare. Unless we plan to abolish the rest of the federal government, large tax increases are inevitable.

Avoiding such tax increases is the best reason to reform Social Security now. It’s too bad President Bush made the Medicare problem so much worse before trying to fix Social Security.

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