In anticipation of the release this week of the midsession budget review by the White House Office of Management and Budget, a summary of the nation’s long-term fiscal problems caused by the projected growth of unsustainable entitlement spending seems in order. We shall focus on Social Security and Medicare.
For both programs, actuaries and trustees consider two long-term time periods — the 75-year horizon (2007-81) and the infinite horizon. In both cases, they are interested in the “unfunded obligation,” which is generally defined as the amount by which projected benefits exceed the sum of program-specific tax revenues (for example, the Social Security payroll tax paid by both employee and employer), any premiums paid by beneficiaries (for example, the drug premium paid by participants in Medicare’s Part D prescription-drug program) and the size on Jan. 1, 2007, of any related trust funds.
Actuaries and trustees express these unfunded obligations in present-value dollars. Thus, when Social Security’s Chief Actuary projected this year that Social Security’s 75-year unfunded obligation was $4.7 trillion, this indicated that if an additional $4.7 trillion had been added to the trust fund at the beginning of 2007, the program would have had adequate financing to meet the projected cost of benefits scheduled in current law over the next 75 years. However, the U.S. Treasury must also find an additional $2 trillion to redeem the bonds presently in the Social Security trust funds. Thus, the real-world Social Security present-value unfunded obligation over 75 years is actually $6.7 trillion.
“Because the deficits for Social Security continue to increase beyond the 75-year horizon,” John Palmer and Thomas Saving (the two public trustees) explain in their 2007 report, “the magnitude of the fiscal problem over the very long run [i.e., the infinite horizon] is much greater than the 75-year picture conveys.” As a result, Social Security’s present-value unfunded obligation over the infinite horizon is $15.6 trillion (including the need to redeem today’s $2 trillion in trust-fund bonds).
Medicare, which includes hospital insurance (Part A), outpatient services (Part B) and prescription drugs (Part D), is in far worse shape than Social Security. The present-value unfunded obligation over 75 years for Part A is $11.6 trillion. That is what would have to be added to the virtually depleted hospital insurance trust fund at the beginning of 2007 to meet the projected cost of current-law expenditures through 2081. For Part B and Part D, the 75-year unfunded obligations are $13.9 trillion and $8.4 trillion, respectively. For all of Medicare, the 75-year unfunded obligation totals $33.9 trillion. Including the $6.7 unfunded obligation for Social Security, the total 75-year present-value unfunded obligation for both entitlement programs is $40.6 trillion.
As explained in the official 2007 Financial Report of the United States, which is issued each year by the U.S. Treasury Department, “The shorter [75-year] horizon understates financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.” This explains the need for the infinite-horizon estimates. At the beginning of 2007, the present-value unfunded obligations over the infinite horizon for Medicare’s three programs total $74.3 trillion: Part A (hospital insurance), $29.5 trillion; Part B (outpatient services), $27.7 trillion; Part D (drugs), $17.1 trillion.
Thus, Medicare’s present-value infinite-horizon unfunded obligation of $74.3 trillion is nearly five times Social Security’s $15.6 trillion. Together, they total $89.9 trillion.
Not comfortable with the infinite-horizon calculations? Then focus just on the $40.6 trillion in present-value unfunded obligations for Medicare and Social Security for the next 75 years. Keep in mind, however, that $40.6 trillion is more than three times last year’s gross domestic product; 220 percent higher than the total market capitalization ($12.7 trillion as of March 31) of America’s 500 biggest corporations; nearly five times the national debt ($8.8 trillion); eight times the publicly held debt ($5 trillion); and nearly 75 percent of the total net worth of U.S. households and nonprofit organizations ($56.2 trillion).