This morning a number of news outlets and bloggers write about the Trustees' report on the problems of Medicare and Social Security financing. But by focusing on the date that these programs are projected to reach bankruptcy, they understate the problem. The New York Times notes that:
Medicare's hospital insurance trust fund, a widely watched gauge of the program's solvency, will run out of money in 2018, two years earlier than projected in last year's report, the trustees said.
And the Social Security trust fund will be exhausted in 2040, one year earlier than projected last year, the trustees said. At that point, in 2040, Social Security tax collections would be adequate to pay only 74 percent of scheduled benefits.
I think that this dramatically understates the problem, and I'll explain why. But Harry Reid disagrees with me. He says that the White House is exaggerating the problem:
The Senate Democratic leader, Harry Reid of Nevada, said the reports showed that "despite White House scare tactics, Social Security remains sound for decades to come." Senator Max Baucus, Democrat of Montana, said the administration had worsened Medicare's problems by promoting managed-care plans, which he said often "cost more than traditional Medicare."
The Washington Post tells the story more or less the same way:
The annual report, issued yesterday by the trustees who monitor the fiscal health of the Medicare and Social Security programs, said the trust fund for the health insurance system for the elderly will run out of money in 2018 -- two years sooner than predicted a year ago and 12 years sooner than had been anticipated when President Bush first took office.
The problem, the report says, has accelerated largely because hospital costs last year were greater than expected.
The forecast also said that Social Security's financial condition has weakened, although its problems are not as great or urgent. It said the retirement system will have enough cash to pay the benefits it owes retirees, disabled workers and workers' survivors until 2040 -- one year less than expected in the 2005 forecast.
So the Post and the Times are agreed: Medicare and Social Security are projected to go bankrupt in 2018 and 2040, respectively. Under the financing system for these programs however, a surplus was (theoretically) built up to cover the cost of benefits down the road. To ensure that the government received a fair and safe return on those accrued funds, they were invested in federal bonds, which would be paid back to the trust funds with interest.
This sounded fine on paper, but in practice, it means that the federal government withdrew money from the trust funds to spend on other things - education, defense, roads, etc. Well, long before the trust funds are bankrupt, the day will come when those trust funds begin to draw down their theoretical surpluses. When that day comes, tax dollars will have to flow from things like education, defense, roads, etc., into the Social Security and Medicare trust funds, to pay for benefits. That's the day that we begin to 'feel the pinch' of entitlement insolvency.
The summary released on Monday is available here. On page 9 of the text (13 of the Adobe file), the trustees identify those dates - the years when benefits exceed revenues for Medicare and Social Security. By their current estimate, 2006 is the first year that Medicare benefits exceed revenues; 2017 is the date for Social Security.
In fact, page 11 of the report released yesterday notes that by the year 2017, the transfer from the general fund to the Medicare and Social Security trust funds will be $487 billion! The trustees themselves stress that the programs reach a critical juncture by this time:
Because neither the interest paid on the Treasury bonds held in the HI and OASDI Trust Funds, nor their redemption, provides any net new income to the Treasury, the full amount of the required Treasury payments to the trust funds must be financed by some combination of increased taxation, increased Federal borrowing from and debt held by the public, and a reduction in other government expenditures. Thus, these payments along with the 75 percent general fund revenue contributions to SMI will add greatly to pressures on Federal general fund revenues much sooner than is generally appreciated.
Now the projected insolvency dates for the entitlement programs shift every year. Sometimes they are moved forward, sometimes backward. And perhaps there will be no problem at all. Maybe in 2017 the voters will say 'you know what? $500 billion is a small price to pay in additional taxes or borrowing to pay for the social compact with seniors and Medicare beneficiaries.' In fact, maybe Harry Reid is overstating the problem, too! Maybe when the trust funds ARE completely bankrupt, people will still want to transfer TRILLIONS of dollars annually to pay for those benefits! After all, there is no magic significance to the insolvency date; it's simply the date when theoretically, the surpluses have been spent. There's no reason that transfers from the general fund to the trust funds have to stop at that time.
On the other hand, if Harry Reid questions whether people will maintain their commitment to pay for entitlement benefits with deficit spending and tax dollars, maybe he ought to get serious about trying to fix the long-term financing problem of these programs. With Medicare leaking like a sieve already, those problems are here TODAY. And they are only going to get worse.
Democrats have long accused Republicans of wanting to gut the entitlement programs, but the surest way to put them at risk is to ignore the problem until we reach crisis point. Now we are a few Presidential terms away from a crisis, but Congressional Democrats are spending a lot of capital trying to convince the public that the problems are exaggerated. Wouldn't this Presidential term - perhaps in the next Congress - be the time to make a deal to 'save' Social Security and Medicare? After all, Bush will not be seeking re-election in 2008, but whoever is elected President will probably have to deal with it. And Reid and the Congressional Democrats may well have to sign off on some reform package. It could turn out that that package will be a feather in the cap of Bush's Republican successor, or it could wind up being a millstone around the neck of his Democratic successor. Why not make the deal now? It is the right thing to do policy-wise, and it is probably the wise thing to do, politically.
Plus, if they keep whistling past the graveyard, the programs may end up being gutted. And the Democrats don't want that, do they?
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