I was recently part
of an interesting discussion about government debt and current debates about
how to control it. One side says that we cannot touch Social Security and
Medicare spending. Those programs are too politically sensitive. Another
side says that it is nearly impossible to control US federal debt without
cutting these two important social programs. There are, of course, many other debates about the debt but I thought I
would focus on this one today: Can or should we cut future spending on Social Security or Medicare?
First a
little story. Then I will get to some data.
Nolan gets a part-time job and finds it impossible to spend all the money he earns each month so he lends the residual to Jason who promises to pay him back in 14 years. Jason spends the money each month. Fourteen years later, when Nolan asks for the money back and shows Jason his spreadsheet of past contributions, Jason agrees that the spreadsheet is impressive and that in fact he now owes Nolan enough money to go to college at Georgia Tech. Unfortunately, since Jason did not invest the money or any other money, he explains to Nolan that he is out of luck. Judge Judy saw otherwise and ordered Jason to find a second job so as to pay Nolan back what he owes him.
You might expect by now that Jason is going to shoot me. But this is not about Jason or Nolan – it is about the United States of America. Despite receiving very large sums of dollars for about 80 years from people paying into the Social Security system and other so-called trust funds, the US has nothing to show for it. Our government has done nothing but spend more each year than it receives in Social Security taxes and all other taxes. As such, instead of a shovel-ready-saving account the government now has a gigantic debt. Worse yet, all the annual balances of the major trust funds are either already in the red or are headed that way (see table below). Despite some funny accounting that shows trust funds with positive balances, there is no lock box and there is no money. It's like Nolan's spreadsheet.
The
USA now has to get a second job – or find a clever way to raise our taxes to
keep the parade going.
Now to the
data. Source is the Congressional Budget Office
The bottom of the table below shows projections of annual flows into and out of major US government trust funds. These projections are based on existing legislation. Notice that in four short years (2021) they will begin spending more than they take in each year. In 10 years, they will have combined deficits of almost half a trillion dollars each year hence. Notice that Social Security and Medicare explain all of the problem with trust funds -- with Social Security going into deficit by 2019. Medicare is already showing annual deficits. And yes, these deficits must be paid out of the general budget each year. That means more debt.
The table also shows that the national debt held by the public (the gross debt is even larger) is going to increase by $3.5 trillion or 25% in the next five years. The annual rate of federal government spending will also increase by 25% or by close to $1 trillion per year in those five years.
Notice that if spending control is to be used to slow or reduce the nation's debt, the choices are limited to make a noticeable impact. Nine of the 10 spending categories listed below will increase between 2016 and 2021. But the expenditure increases are small for all of those except for three. The increase in defense spending is expected to be $58 billion; for income security the rise is $19 billion. Compare those amounts to the much bigger increases for Social Security ($281 billion), Medicare ($220 billion), and Net Interest ($194 billion). Since the latter is unavoidable, we are left with only two real opportunities to make a dent in spending and the debt.
No one wants to push old people over cliffs. But if one is sincere about managing the country's debt load, the choices are pretty limited. And notice again, we are not talking about cuts in any program. The annual amounts of spending for Social Security and Medicare combined will increase by half a trillion dollars per year by 2021. That's a whopping per year 31% increase in Social Security spending and 32% per year for Medicare. Don't tell me there isn't room to cut before it starts to hurt grandpa.
| 10 Year Budget Projections | ||||
| (in billions of dollars) | 2016 | 2021 | Change | % of Total |
| Social Security | 910 | 1191 | 281 | 30 |
| Medicare | 692 | 912 | 220 | 23 |
| Medicaid | 368 | 474 | 106 | 11 |
| Healthcare Subsidies | 42 | 85 | 43 | 5 |
| CHIP* | 14 | 6 | -8 | -1 |
| Income Security | 304 | 323 | 19 | 2 |
| Defense | 584 | 642 | 58 | 6 |
| Net Interest | 241 | 435 | 194 | 20 |
| NonDefense Discretionary | 600 | 641 | 41 | 4 |
| Total | 3755 | 4709 | 954 | 100 |
| Government Debt | 14.2 | 17.7 | 3.5 | |
| Held by the Public | ||||
| (in trillions of dollars) | ||||
| Trust Fund Annual | ||||
| Deficits and Surpluses | ||||
| In billions of dollars | ||||
| 2016 | 2019 | 2021 | 2027 | |
| Social Security | 30 | -23 | -96 | -366 |
| Medicare | -6 | 3 | -8 | -90 |
| Mass Transit | 57 | -16 | -18 | -25 |
| All Trust Funds | 314 | 72 | -20 | -454 |
*Children's Health Insurance Program
Dear LSD. Aside from the budgetary/financial info you present there is also the demographics affecting both SS and MC. Both are projected to run out of moola in 10-15 years sufficient to meet obligations. We boom-boom-boomers will be drawing down existing funds faster while the inflow of funds to the two will hardly increase. There is also inefficiency, error, and fraud that should be eliminated.
ReplyDeleteI’m coming around to accepting that the retirement age should be increased from 67-69 ‘cause we’re living longer and that the $127,000 cap on wages beginning in 2017 will only extend the viability of SS for so long. Those two patches are hard choices for pols wanting to continue their taxpayer-paid comfy DC accommodations and activities, retirement, and health insurance benefits—but as we’re fond of saying there’s got be an adult in the room—er, in Congress. While those two fixes would be hard to swallow reducing benefits would be even harder—particularly for folks near retirement who have planned for current SS benefits. Asking employees/employers to fund 401K and other private retirement options to augment SS benefits would be difficult as well because of the headwinds wages/salaries are facing and will continue to face indefinitely—workers need funds to live on, too. (Thank LBJ for taking the SS lock-box (wink wink) out of the Treasury vault and putting the funds into the general op budget. But, pols would eventually have gotten their hands on it anyway.)
MC is a different situation. It has a middleman (insurers) between the beneficiary and the govomit—SS doesn’t—and the current proposals to fix healthcare including MC so far don’t seem to address the inefficiency, error, and fraud—both within the insurers and the MC program/administrators.
There is room to cut, but don’t cut promised benefits—rather go for the less painful, low-having fruit of inefficiency, error, and fraud. First make the programs more cost-effective, efficient, and error/fraud-free, then take on the hard choices. Yes, that won’t make a dent in the longer-term increase in the overall debt due to those programs, but it might make making the harder choices easier once those non-value-added factors are eliminated.
AS usual, thanks for your good thoughts Tuna. We wouldn't be discussing this today if this was easy politically. I agree there is waste and fraud but even that part is not easy to detect and stop. I won't cite any of these -- but I have seen plenty of studies in the past that show that with several tweaks SS and Medicare can be saved. Raising the age, increasing payroll taxes, means testing, and several options -- if used in concert could lead to marginal changes to individuals and major changes to future inflows and outflows. Unfortunately government has taken all that off the table.
DeleteA very good synopsis, Prof! I fear we've kicked this can down the road far too long. Any solution today will result in several groups' oxen being gored, especially the "means testing" one. Hard pill to swallow when I'm told I paid into a program and will get nothing out. That's true socialism! Personally, I like the Galveston Co. TX solution of a few years back.
ReplyDeleteThanks Fuzzy. We have kicked so many cans down the road that the cars don't have room to drive on them anymore. Even socialists wouldn't claim our financial mess. SS and Medicare growth are pretty much swallowing up our tax money. I am not sure that is how it was intended.
DeleteOur children will never see these programs but will have to pay more taxes to fund them. As a small business owner I can only look to selling my two businesses to get a replacement of my SS and MDC because there are no private pension plans available to less than 50 employees type of small business. In the 60's, 70' and part of the 80's the only savings programs were the Savings and Loans and most of us had earning power suitable to pay the mortgage, pay for weddings, and pay for our kids schools. fortunately that was a good investment because my kids are doing quite well. I believe I am typical of the average baby boomer. If I quit working then it will be my wife's savings ( which I contributed to) and her pensions. Fortunately I live in a low cost beach community so living in a double-wide will not be so bad.(just kidding).
ReplyDeleteIf the SS Administration was a true business it would have earned a D- in operations and long term decision making. That cannot be changed. Medicare is under SS and is needed to support a population whose health record is not that good whether self inflicted or just getting old. But it beats the current health care programs either through OC or via private providers. The best we could do for our employees whose average wage is $40K ( in the beach community that it middle class) is to pay 1/2 of the $800 per month bill which means they pay the other half and in most cases that is creeping up on their rent cost. Add 2 to 3 children to that and several unmarried moms ....nothing much left to spend. Healthcare is making them abjectly poor.
What do other countries do? Countries in the G20 who top out with the highest level of education, happiness and job formation. Are they in the same predicament? NO! and they are socialist but they produce great products, literature, inventions and electronics. What are we doing wrong? Let politics control our livelihood? Not find ways to create private sector jobs, train the workers, get healthier? Yes, the government has blown away our savings that we were forced to give them without making sure that we could collect on what we invested.
Thanks Hoot. The US government made a clear decision way back when not to let markets invest money from SS. I guess they didn't trust markets and thought government was the best protection for our money. Now as you say, the cupboard is bare. We are lucky that our generation will get some of our money back. But if the younger folks are going to have SS then we have to restructure. It isn't impossible. I think it was back in the 1970s that we saw problems looming and made some reforms to SS. I think we can do similar reforms now. As for healthcare and other countries...Most Americans would not stand for the levels of service in some of those countries. Those countries ration healthcare and sometimes old folks don't get their heart values when they want them...I'm just saying that if we tried to duplicate their systems here they might not work so well.
DeleteCanada is a good example of what you say.
ReplyDeleteEh, but the Molsens are good there!
DeleteTwo comments. First, SS was not set up to be a funded system. It was (and for the most part still is) an intergenerational transfer system in which the working generations provide funding to the retired generation. Second, at the most basic level any retirement system shares this characteristic -- once someone retires (that is, no longer contributes to production) whatever that person consumes is produced by someone else. How this transfer from the working to the non-working is accomplished is a complicated question, but inherently second order. The first order question is how large the transfer should be.
ReplyDeleteThanks Bill. No argument about your two points. But perhaps a third point is that the system was not likely designed to bankrupt the government. My post shows the huge portion of future government spending allocated to SS, Medicare, and Medicaid. My point is that if one is to remedy debt then it seems crazy to ignore the elephant in the room.
Delete