The U.S. Treasury yesterday published the annual reports from the Trustees of Social Security and Medicare, which examine the short- and long-term health of America’s most treasured domestic programs.
Buried in this year’s 250-page tome is some of the most vital information the federal government has to offer. It tells how much money your kids and grandkids will have to pay for you to get your Social Security and Medicare benefits.
Despite pages and pages of complex tables and charts, the moral of this story is simple: Social Security and Medicare are promising far more benefits than they can afford.
A lot has changed since last year’s report. Newer trends of economic growth, employment and higher productivity have marginally affected Social Security’s projections — but not much. Social Security is still expected to run small surpluses until 2018, when it begins racking up growing annual debts. According to the new report, the government needs to have $10 trillion in the bank today earning interest to cover the shortfall. Needless to say, it doesn’t.
If that was the whole problem, it would be bad enough. Unfortunately, it is only the tip of the iceberg, because the adoption of the new Medicare prescription drug bill last year dramatically changed the forecast for Medicare.
Last year’s annual report projected Social Security and Medicare would, together, run small surpluses and actually add money to the general budget until 2008. The addition of the prescription drug bill has changed these projections so radically that Social Security and Medicare will now instead drain about $60 billion from the general budget this year alone.
In other words, this year’s Medicare deficit is so large Medicare will spend all it collects in payroll taxes, drain all of Social Security’s surplus for next year and require $60 billion from the general fund to pay all its bills. And that’s just the first year. In all, the government needs more than $60 trillion in the bank earning interest today to pay for all of Medicare’s shortfall — up from about $38 trillion last year.
This huge unfunded liability has real effects on real people; after all, we’ll somehow have to close that $70 trillion debt between what Social Security and Medicare promise and what the two programs can afford.
Let’s say, for example, we choose not to reduce benefits and we don’t want to double taxes on future workers. We will have to take the money out of other government programs. Last year’s reports noted Social Security and Medicare shortfalls would claim nearly half of all federal income tax revenues by 2050, meaning the government would have to cut all other federal programs in half to free enough money to pay full benefits to Social Security and Medicare beneficiaries.
But this year’s reports show the two programs will require nearly three-fourths of all income tax revenue by mid-century, and will reach the halfway mark by 2030.
We knew long before the Medicare prescription drug law was implemented that Social Security and Medicare faced touch times ahead. America is aging. When Social Security began, there were 42 workers paying into Social Security for each retiree collecting benefits. By the time Medicare was put into effect in the 1960s, the ratio had fallen to 16-to-1. Today, the ratio is 3-to-1. Between now and midcentury, after retirement of the 77 million Baby Boomers, the ratio will decline to 2-to-1.
This is important because Social Security and Medicare aren’t savings programs. Instead, they pay benefits to today’s retirees using contributions collected from today’s workers. When we current workers retire, our benefits will be paid by our kids and grandkids, and so on.
That’s why so many economists suggest reforming Social Security to include personal retirement accounts. Social Security’s burden on future taxpayers would be dramatically reduced because each worker would save part of his or her own Social Security benefits.
While there are short-term costs to such a proposal, the cost of doing nothing is much higher. Further, benefits of reform for the long-term health of the program cannot be understated. Not only will our children be able to live knowing their retirement is secure, but Social Security will no longer be a vacuum sucking resources from other important priorities, such as roads, schools and our nation’s defense. Plus, personal accounts will stimulate economic growth and free up resources needed to fix Medicare — a problem that has only gotten worse.
Matt Moore is senior policy analyst for the National Center for Policy Analysis.