Continued from page 1

Unfunded obligations

Another way to grasp the severity of the problem is to answer a simple question: Above and beyond the payroll tax receipts and beneficiaries’ premiums the programs will receive in the future, how much money would the two largest entitlements - Social Security and Medicare - have to invest in interest-bearing accounts today in order to meet their benefit commitments during the next 75 years?

These “present-value” totals are the “unfunded obligations” of the programs. Not only are they huge, but they are also growing very rapidly. That’s especially true for Medicare because health care costs are rising so much faster than the economy’s output.

According to the 2007 Financial Report of the U.S. Government, prepared and issued by the U.S. Treasury, Medicare’s unfunded obligations totaled $34 trillion last year. That included more than $8 trillion in unfunded obligations for Medicare’s prescription-drug program, which Congress passed in 2003.

Social Security’s unfunded obligations in 2007 were nearly $7 trillion. To be fair, this sum included $2 trillion of bonds in Social Security’s trust funds. However, those assets can only be redeemed by dipping into general revenues or by borrowing because the White House and Congress have already spent the money. Remember Al Gore’s lockbox? Well, someone picked the lock.

Mr. Walker, the former comptroller general, reported earlier this year that the $41 trillion in unfunded obligations in 2007 represented an increase of more than 200 percent since 2000 alone, when they totaled $13 trillion.

“The window for timely action is shrinking,” the GAO warned Congress (again) in a June report. “Albert Einstein said the most powerful force in the universe is compound interest, and today the miracle of compounding is working against the federal government,” the GAO explained. “Meeting this long-term fiscal imbalance is the nation’s largest sustainability challenge.”

The long-term fiscal challenge has already begun - and the trends are ominous.

This year, the outlays for Medicare Part A (hospital insurance) will exceed cash income, which is generated by a payroll tax. In two years, Social Security’s cash surplus, which is being used to finance other federal spending, will begin declining, putting pressure on the rest of the budget. In 2017, Social Security’s cash flow turns negative, requiring still more borrowing or the use of general tax revenues to fund benefits. In 2041, the Social Security trust funds will be exhausted, and payroll-tax receipts will be sufficient to pay only about 75 percent of promised benefits.

There are no trustee reports on Medicaid, which is funded jointly by the federal and state governments.

Social Security proposals

Presidential candidates are reluctant to stick their necks out proposing entitlement reforms.

“Understandably, talking about the necessary reforms is not always welcomed by the voters, whether the changes are tax increases, slowing the growth of benefits or increasing the retirement age,” said Ms. MacGuineas. Social Security did not earn its reputation as the third rail of American politics for nothing.

Even relatively minor forays into the entitlement-reform arena can be treacherous for politicians. For example, in an effort to demonstrate that he would not begin a negotiation over Social Security with an ultimatum, Mr. McCain said all options would be on the table, even payroll-tax increases, which he opposes. He was immediately pilloried by conservatives, including talk radio and the Club for Growth.

In the past, Mr. McCain has supported personal investment accounts by diverting a portion of Social Security’s payroll taxes. Now he says he favors personal investment accounts as a supplement to Social Security. In September, he repeatedly told AARP, the nation’s largest group of older Americans, that he did not support privatizing Social Security. Mr. McCain talks favorably about the 1983 compromises reached between President Reagan and House Speaker Tip O’Neill based on the work of the Social Security commission headed by Alan Greenspan.

Story Continues →