Understanding the Long-Term Finances of Today's Entitlement Programs
A key reason
why we have a problem with entitlement programs like Social Security
is that they were enacted with insufficient regard to their long-term
finances. For example, the only concern Congress had about the
recently enacted Medicare drug benefit was whether it would cost
less than $400 billion in the first 10 years. The period afterward
was almost completely ignored in congressional debate.
makes it too easy to enact new programs that cost little in the
short run but are massively expensive in the long run. In the
case of the drug benefit, the costs in the first two years were
virtually nil and then it phases in for several more. It is only
in the last years of the initial forecast period that the long-term
spending trend becomes visible. At that point, the drug benefit
will cost taxpayers more than $100 billion per year, according
to the Congressional Budget Office.
Once a year,
however, we get a look at the government's largest long-term financial
liabilities when the trustees of the Social Security and Medicare
systems issue their annual reports. The prose may be impenetrable,
but it makes for interesting reading if one knows where to look.
the actuaries, who actually write the trustees reports, made an
important methodological change. Historically, they had presented
financial data for 75 years out. But some of the trustees felt
that it would be more informative if perpetual costs could be
summarized in present value terms. (A present value calculation
takes account of the fact that $1 in the future is worth less
than $1 today even with no inflation.) These figures have become
the most revealing indicators of the true financial condition
of our major entitlement programs.
with Social Security, which President Bush repeatedly says is
in precarious financial condition, we see that the present value
of all future costs for that program less expected taxes in perpetuity
is estimated at $13.7 trillion. The $1.7 trillion currently in
the Social Security trust fund is treated as if it is a real asset,
which lowers the unfunded liability to $12 trillion.
who do not yet qualify for Social Security benefits will get back
less than they will pay in present value terms, it lowers the
long-term cost by another $900 billion, for a net unfunded liability
of $11.1 trillion -- $12.8 trillion if you don't believe there
are really any assets in the trust fund.
we would need about one year's gross domestic product in a bond
fund somewhere, backed by productive tangible assets earning a
real return, in order to pay all of Social Security's promises
without either raising taxes or cutting benefits.
As bad as
this news is, however, it pales in comparison to Medicare's problems.
According to its trustees, Part A, which pays for hospital care,
has an unfunded liability of $9.4 trillion for current participants
and $14.7 trillion for future participants, for a total of $24.1
Part B, which pays for doctors' visits, will require $25.8 trillion
in funds from taxpayers to pay for promised benefits over and
above the modest premiums that retirees pay . And the newly enacted
Medicare Part D, which pays for prescription drugs, will need
$18.2 trillion from taxpayers on top of beneficiary premiums and
all of Medicare's unfunded costs yields a total of $68.1 trillion
-- six times Social Security's unfunded liability, which President
Bush says is in crisis and requires immediate action to repair.
Indeed, the drug benefit alone, which he rammed through Congress
two years ago, has a liability $7.1 trillion greater than Social
Security. This suggests that we could repeal the drug benefit,
fund Social Security forever with no tax increases or benefit
cuts and still cut $7.1 trillion off our national indebtedness.
To make these
very large numbers somewhat more concrete, Social Security's unfunded
liability comes to 1.2 percent of GDP in perpetuity (1.4 percent
without the trust fund) -- about what is currently raised by the
corporate income tax. The comparable number for Medicare is 7.1
percent -- about what is raised by the individual income tax.
And remember that these figures are for the unfunded portion of
these programs, so they are over and above payroll taxes.
conclusion is that virtually 100 percent of all federal taxes,
on a present value basis, do nothing but pay for Social Security
and Medicare. Unless there are plans to abolish the rest of the
federal government, large tax increases are inevitable.
such tax increases is the best reason to reform Social Security
now. It's too bad that President Bush made the Medicare problem
so much worse before trying to fix Social Security.
2005 Creators Syndicate
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