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.