Every year at this time, the Social Security and Medicare Trust Fund Trustees report on the current and projected financial conditions of the two funds. The news released Tuesday was not good, and it's likely to get worse over the next few years.
Medicare went cash-flow negative last year, and the Trustees estimate it will be insolvent in 2017 -- only eight years from now. Social Security will go cash-flow negative in 2024 and will be insolvent in 2037 -- a more manageable 18 years from now, but four years earlier than last year's estimate. I'm not too worried about Social Security. Although it's long-run deficit equals 2% of taxable payroll ($111 b. per year in current dollars), a combination of indexing modifications, increased retirement age, and modest payroll tax increases can keep it solvent indefinitely. Medicare is a different story. It will require major surgery. The trustees estimated its long-run deficit to be 3.88% of payroll ($214 b. per year in current dollars). If Congress passes a major health care reform this year, that will help, but we will still be far away from long-run solvency.
Click on the above link to read an excellent summary in readable English from your government.
2037 is 28 years away not 18.
2037 is 28 years away not 18. But what's a decade or two among friends.
2037 is 28 years away not 18.
2037 is 28 years away not 18. I guess that makes it even more manageable.
"Solvency" per se is essentially irrelevant
Pete,
There is nothing magical (meaning nothing really significant) about the year "trust funds" become "exhausted". These "trust funds" are not holders of piles of cash or income-producing assets outside of taxation, but rather are merely claims against future tax revenues. As a "trust fund" balance is "paid off" (e.g., "payment" on the "special issue" Treasury bonds "held" by the Social Security "trust fund"), general fund tax revenues are allocated to spending on the respective programs. And what changes after a "trust fund" is "exhausted"? Nothing. General fund tax revenues continue to be allocated to spending on those programs, just as was happening and as would continue to happen if the "trust fund" were not "exhausted". It's just intragovernmental bookkeeping, not anything with any practical effect or relevance for policy choices.
Nor is "solvency" really a relevant metric. "Solvency" merely reflects spending vs. revenues from a dedicated tax at its current tax rate and applicable income. These dedicated taxes are merely part of the whole of overall taxation that (along with borrowing) is paying for current spending, since Medicare and Social Security are pay-as-you-go programs. What matters for defining our long-term fiscal problem and for weighing alternative solutions is our OVERALL long-term fiscal imbalance: Projected OVERALL revenues less projected OVERALL spending, and the resulting deficits and debt as a percent of GDP (and in relation to assets and national net worth, although I haven't seen many analyses using such ratios).
Internal gaps between a given program's spending and its dedicated tax revenues are essentially irrelevant to that picture. Even if such a program under its current dedicated tax structure were projected to be infinitely "solvent", it wouldn't mean that spending on that program wasn't contributing to our overall fiscal imbalance, and we could still reduce our overall fiscal imbalance by reducing spending on that program (and, in conjunction, reducing that dedicated tax and offsetting that tax cut with a revenue-neutral increase in other taxes, yielding no change in projected revenues, lower projected overall spending, and thus lower projected overall deficits). And conversely, a program being "insolvent" does not necessarily imply a problem -- it just means that the dedicated tax revenue must be supplemented with general fund tax revenue. But again, the focus -- how we define and measure "the problem" and its contributing factors and how we weigh alternative potential solutions -- should be on OVERALL revenues and OVERALL spending.
Per the above, the reason Medicare is a bigger contributor to our long-term fiscal imbalance problem than is Social Security has nothing to do with their relative degrees of "solvency", but rather simply because long-term projected Medicare spending is higher than that for Social Security.
Solvency
True, there is no pile of cash waiting to pay Social Security or Medicare benefits. These liabilities are imposed by the government on current and future taxpayers on behalf of current beneficiaries. The reason I focus on insolvency is simply that Congress has shown time and time again that it will wait until the point of insolvency before it acts.
"solvency"
It's certainly true that the political debate tends to center around "solvency" and "trust funds" and these pervasive, fundamental misconceptions thereof, and it is certainly important, from a political strategy standpoint, to work within the context of these widespread misunderstandings, given that it's unrealistic to think that they will go away and be replaced by a rational conceptual framework. I just wanted to point out that it is indeed a nonsensical framework.
It reminds me a bit of marketing strategy consulting work I did for a manufacturer of portable air compressors (for car/truck tire inflation). There was (and, I assume, still is) a widely-held misconception in the market that the higher the PSI associated with a given compressor (pounds per square inch of air pressure that the compressor can deliver into the tire), the more capable it was of fully inflating larger tires and the faster it could do so, even though even the lowest PSI models were easily capable of fully inflating even light truck tires, and even though, other things equal, the higher the PSI of the compressor the slower the rate of inflation. So manufacturers (and in turn, retailers) offered, as in many product categories, a supposedly "good-better-best" assortment, with the highest PSI models commanding the highest price points and yielding the highest profit margins, ceteris paribus, and in my client's case (and some others), the highest PSI model targeted at light truck owners and positioned accordingly, based on the misconception. It was in no one's interest to invest time and money into educating consumers and correcting the misconception, and in fact it was more profitable for manufacturers and retailers to allow (dare I say support) the perpetuation of the misconception (just as both "sides" of the Social Security debate have found the aforementioned misconceptions convenient to their respective rhetoric and agendas). To compete effectively, maximize shareholder value, and to even survive in the product category, my client had to work within the framework of these pervasive, persistent and hard-to-overcome misconceptions.
Apropos of my comment above,
Apropos of my comment above, Clive Crook states it well:
Admittedly, the trust-fund structure of these programs is a bookkeeping fiction. In economic terms, Social Security and Medicare are really just enormous pay-as-you-go programs, financed out of current taxation. The disappearance of the funds has no economic significance. The point is simply that at present levels of payments and receipts, they are adding faster than before to projected fiscal deficits. http://www.nationaljournal.com/njmagazine/print_friendly.php?ID=wn_20090...
totally agree with your
totally agree with your accounting point. i view the FICA tax as a tax on the young, i just add it to my "general tax" together with income tax, property tax, sales tax, ... and the fact that the benefits will be higher than FICA receipts only means that the overall spending will have to shrink unless benefits are curtailed now (politically unlikely).
usa fails (with respect to almost any other developed country) in public education and also in terms of "better country to have kids" according to Unicef. thanks god UK exists so that USA is not at the bottom. it begs the question: should the young leave usa will this tsunami passes? the ideal country should be a developed one with great public education, universal health coverage and good demographics. netherlands for example already solved their pension issues. that's a good possibility. but there are many other countries that can offer more to young families in terms of needed services and offer refuge while the AARP and Congress figure out how to solve the issue.