2005 March 24 Thursday
Social Security Go Broke Date Projected One Year Sooner

Social Security's financial projection just got worse.

The trust fund for Social Security will go broke in 2041 -- a year earlier than previously estimated -- the trustees reported Wednesday. Trustees also said that Medicare, the giant healthcare program for the elderly and disabled, faces insolvency in 2020.

But the real financial crisis will come much sooner.

Equally important are when benefits paid to the elderly start exceeding the payroll taxes designated to support the two programs. That's when the government will have to increase its borrowing on financial markets, raise taxes or divert money from other government programs to sustain Medicare and Social Security at current levels.

For Medicare, the threshold when benefits exceed program income occurred last year. For Social Security, that threshold will be crossed in 2017, one year earlier than the 2018 date projected in last year's report.

Social Security and Medicare are going to be demanding that the US Treasury buy back much of the bonds the Treasury has sold to the trust funds.

In 2004, combined benefits paid out by Social Security and Medicare exceeded the programs' tax revenues by less than $50 billion. By 2017, that shortfall is projected to hit $515 billion, or 2.3% of GDP.

While Medicare outlays currently equals 2.6% of GDP and Social Security is 4.3% at some point in the future the more rapid growth of Medicare will make Medicare a larger percentage of GDP than Social Security. Medicare's unfunded liabilities are several times the size of Social Security unfunded liabilities. This is, parenthetically, one reason why I'm far more interested in health policy than I am in Social Security reform.

Social Security has $4 trillion in unfunded liabilities over the next 75 years as compared to $29 trillion in unfunded Medicare liabilities over the same time period.

To pay all scheduled benefits over the next 75 years, the government would have to raise an additional $4 trillion in today's dollars, $300 billion higher than the figure projected last year.

I think these projections understate the size of the problem because medical science is going to advance more rapidly and extend life expectancy more rapidly than the actuaries are assuming. We need to raise the retirement age. We need much more medical research aimed at developing treatments that will delay the onset of deterioration and diseases that reduce the ability of people to work in late middle age.

Tax increases are one way to close the Social Security funding gap.

One way to measure that shortfall is to calculate how much you would need to raise payroll taxes to keep the system solvent for the next 75 years. Based on the latest numbers, the payroll tax would have to be raised 1.92 percentage points to 14.32 percent of wages. Currently, the payroll tax rate is 12.4 percent, half of which is paid by employers and half by employees.

Another way to measure it is in terms of benefits, which would need to be cut by 13 percent to achieve solvency over 75 years.

I think the voters are too ignorant and lazy to think their way through the choices and trade-offs. Most people don't want to accept that they must either get less benefits or pay more in taxes. So demagogues in Congress will probably manage to derail any reforms.

Share |      By Randall Parker at 2005 March 24 01:54 AM  Economics Demographic


Comments
GUYK said at March 24, 2005 4:02 AM:

I think you are right in your final analysis. Voters want the free lunch! They refuse to recognize that the system is broke!

I do believe that democrats do not want to fix medicare until such time as they can convince the public to embrace a cradle to birth social system that includes free medical care. I hope the day never comes but I do believe that it is rapidly approaching. A big bite out of paychecks to support a medicare system that a 25 years old figures he/she will never need or use, especially when they are paying a big percentage of their income for personal health insurance, might cause a rebellion in the work place that would eventually bring on some form of national health insurance.

I see some advantages of a government run health program as well as the disadvantages. I do believe the disadvantages overrule the advantages.

crush41 said at March 24, 2005 10:45 AM:

Voters want the free lunch!
---------

I don't want the lunch, and I don't want to pay for the lunch either. These two ridiculous entitlement programs are going to suffocate my generation. Chuck Hagel is proposing raising the age to receive benefits a whopping one year (two decades from now), and even that is meeting opposition. People are living to 78 on average--how about indexing the reception of benefits to average life expectancy? That would obviously be much more in line with what the program was intended for.

John S Bolton said at March 24, 2005 5:01 PM:

These projections depend also on life expectancy assumptions, which could be way off.

GUYK said at March 24, 2005 6:02 PM:

Life projection could well be way off-in either diection. One would hope that modern medicine and the event of cell stem research will prolong life to an elder age. However,there is always the possibility of an onset of some unknown virus which might kill several million before a remedy can be found. Just being a pessimist tonight. I plan to collect my socialable security check until I am 90 years ols and then get shot by a jealous husband!

PacRim Jim said at March 25, 2005 8:53 AM:

Doesn't bother me. I'll just die a year earlier.


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