Tuesday, April 24, 2007

Entitlements in the U.S.A.

Every year the Board of Trustees for Social Security and Medicare releases a report on the status of the programs. Here is the executive summary:

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2007 Annual Reports.

The financial condition of the Social Security and Medicare programs remains problematic; we believe their currently projected long run growth rates are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline and then turn into rapidly growing deficits as the baby boom generation retires. Medicare's financial status is even worse. Medicare's Hospital Insurance (HI) Trust Fund is already expected to pay out more in hospital benefits this year than it receives in taxes and other dedicated revenues. The growing annual deficits in both programs are projected to exhaust HI reserves in 2019 and Social Security reserves in 2041. In addition, the Medicare Supplementary Medical Insurance (SMI) Trust Fund that pays for physician services and the new prescription drug benefit will continue to require general revenue financing and charges on beneficiaries that grow faster than the economy and beneficiary incomes over time.

The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will place mounting pressure on the Federal budget. In fact, this pressure is already evident. For the first time, a "Medicare funding warning" is being triggered, signaling that non-dedicated sources of revenues-primarily general revenues- will soon account for more than 45 percent of Medicare's outlays. By law, this warning requires that the President propose, and the Congress consider, remedial action.

We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs. The longer we wait to address these challenges, the more limited will be the options available, the greater will be the required adjustments, and the more severe the potential detrimental economic impact on our nation.
The news making the rounds is that the year of bankruptcy has been extended out a year for both programs: 2019 for Medicare and 2041 for Social Security. But things are about to get real vertical on the cost chart (entitlement spending as a percentage of GDP):

In 2006, the combined costs of Social Security (blue line) and Medicare (red line) added up to a manageable 7.3% of GDP. But things are about to get ugly:

Social Security outgo amounted to 4.2 percent of GDP in 2006 and is projected to increase to 6.3 percent of GDP in 2081. Medicare's cost was smaller in 2006-3.1 percent of GDP- but is projected to surpass the cost of Social Security in 2028, growing to 11.3 percent of GDP in 2081 when it will be 80 percent larger than Social Security's cost. In 2081, the combined cost of the programs will represent 17.6 percent of GDP. As a point of comparison, in 2006 all Federal receipts amounted to 18.5 percent of GDP.
Which reaffirms my long-standing argument for entitlement reform sooner rather than later: unless something is done, entitlements will crowd out all the spending for things we call the "government." Simply put: if Social Security and Medicare payments equal all incoming federal taxes, there's nothing left.

Extra - Bull Dog Pundit notes that the AARP wants more.

More - Statement from the Treasury Secretary.

And this - Let's wait for the iceberg:

"I don't think we will make any substantive progress on reform until a crisis is looming," said Mark Zandi, chief economist at Moody's Economy.com, an economic forecasting company. "Reform may be prompted by some sort of financial crisis as investors respond to the worsening budget deficits."
So there you have it: reform will be driven by Chinese bankers.


Brian said...

C'mon Eric. That's years off. Politicians need to get elected now!

As long as the liberal goofs at the AARP scare the crap out of old people telling them that they will be eating dog food, nothing will ever get done. My father-in-law, a conservative old schooler to the bone, nevertheless becomes a total idiot when it comes to Social Security because all he cares about is that the check he has become used to keeps coming without being cut. And, like all other old people, he'll get off his ass and vote in every election, even if it is only a school board election.

Luckily for me, and I am sure for you, I have been involved in a retirement plan for years and am living my life and saving my money like Social Security will be abolished when I am 61 years old.

Eric said...

Brian: you know it. I'm planning my retirement with the assumption that Social Security = zero.

My only fear is that by then the government will be so broke that it will seize my 401(k) savings for the public good.

TGK said...

There are politicians, mostly in the GOP, who understand the looming threat (it's pretty straightforward stuff), but they're too scared to do anything about it, because there is such a climate of fear and dependency out there (a climate which is deliberately fueled by the Left).

SS isn't the "third rail" it used to be, but by the time people get the courage to do something about the problem, the solution will be tremendously painful.