Tuesday, January 4, 2005

President Bush has declared Social Security reform his principal domestic priority this year. Press reports indicate the White House has persuaded private groups to spend millions promoting its plan, though we have heard no specifics.

It is not clear what is driving the urgency of Social Security reform. It is desirable, to be sure, but nothing will happen to anyone’s benefits for some time to come if nothing is done. By contrast, the Medicare system is on the verge of collapse, according to a new government report.

The Financial Report of the U.S. Government for fiscal 2004, released just before Christmas, says the unfunded liability of the Social Security system is $12.5 trillion, an increase of $810 billion over the previous year. However, the Medicare deficit is twice that: $24.6 trillion, a rise of $9.6 trillion from 2003.

In other words, in just a single year, the unfunded liability of Medicare increased by three-fourths of Social Security’s total deficit. Yet instead of reforming Medicare, which is hemorrhaging money, we are talking only about Social Security, which is in sterling financial shape by comparison.

Indeed, not only are we not talking about reining in Medicare’s exploding costs, we are preparing to make them much worse. Next year, the new Medicare drug benefit is fully effective, which will drive up Medicare spending sharply. This is the reason for the rise in its unfunded liabilities. Medicare’s trustees estimate the long-term cost of the drug benefit at $8.1 trillion, accounting for the bulk of its increased liabilities last year.

Another important difference between Social Security and Medicare is the former’s costs grow very predictably, whereas the latter’s can only be guessed, since they rise so fast.

Consequently, we can formulate policies to deal with Social Security’s long-term problems relatively easily. But we haven’t even begun to think seriously about how to ration medical care, which must happen at some point.

For example, we could change Social Security’s indexing formula and eliminate almost all its long-term deficit. This would not cut one person’s benefits, current or future, below today’s. All it would do is eliminate future real benefit increases over and above inflation.

Social Security actuaries say someone with average lifetime earnings who retired at age 65 last year got $14,209 in benefits. This year, that same person will get $14,384 (in 2004 dollars) because initial benefits are indexed to wages that generally rise faster than prices. (This has nothing to do with the indexing of benefits after people begin drawing them, which rise annually with the inflation rate. It has only to do with determining benefit levels when first drawn.)

Unless the indexing formula is changed, real benefits will rise indefinitely. For someone with average lifetime earnings, retiring at 65, Social Security benefits (in 2004 dollars) will reach $15,772 in 2025 and continue rising to $28,421 in 2080. The only reason this increase isn’t greater is the normal retirement age will rise to age 67 for those retiring after 2025. Someone retiring at this age in 2080 would get real benefits (in 2004 dollars) of $32,795 yearly.

Estimates show just keeping real benefits unchanged — still indexed for inflation — would allow perpetual payment of Social Security benefits with no increase in tax rates. Future retirees will get exactly what current retirees get in inflation-adjusted terms. They just won’t get more, as they will under current law.

If I were a Democrat, I would support this reform and thus get the issue of Social Security’s solvency off the table. This would force Republicans to justify private accounts on their own terms, rather than as a cure for Social Security’s long-term deficit. If Republicans don’t go along, it would prove they aren’t interested in saving Social Security but have another agenda.

With Social Security secure in its present form, Democrats could then turn their attention to Medicare, which only they can fix. Republicans won’t make any effort to reduce Medicare growth for fear it would be too easily demagogued as a benefit cut. Therefore, Democrats must take the initiative to get control of Medicare and put it on a sound long-term footing.

The Financial Report’s introduction by David Walker, comptroller general of the United States, makes clear our long-term budget trends are unsustainable and, if not addressed, will cripple the economy, threaten national security and reduce the quality of life for all Americans. The political party that steps up to this challenge will be the one that deserves to govern.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.

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