2006 May 01 Monday
US Old Age Retirement Entitlements Finances Deteriorate

Financial projections by the trustees for the massive US government old age entitlements programs Medicare and Social Security just got a lot worse.

The financial troubles daunting the Medicare system have deepened during the past year, according to a government forecast that says the federal fund that pays for hospital care for older Americans will become unable to cover all its bills a dozen years from now.

The annual report, issued yesterday by the trustees who monitor the fiscal health of the Medicare and Social Security programs, said the trust fund for the health insurance system for the elderly will run out of money in 2018 -- two years sooner than predicted a year ago and 12 years sooner than had been anticipated when President Bush first took office.

That is one very fast deterioration. Bush and Congress helped that deterioration along a great deal by passing the Medicare drug benefit.

The article cites rapid increases in hospitalization costs as the major reason for the most recent two year shift toward an even earlier bankruptcy.

The Heritage Foundation reports that given current trends Medicare and Social Security will consume about half of all federal tax revenue by 2030.

Medicare and Social Security will require growing amounts of federal income tax revenue. Today, 6.9 percent of federal income taxes go towards the two programs. Dr. Thomas Saving of Texas A & M University, a public trustee of the Medicare and Social Security trust funds, estimates that, in 2020, 26.6 percent of all federal income taxes will go to paying for Medicare and Social Security. By 2030, that number will increase to 49.7 percent.

The United States will not be able to afford much of a military, let alone foreign adventures.

The drug benefit added $8.7 trillion to the unfunded Medicare liability. So why do the Democrats think that Bush is a conservative?

Medicare’s Financial Crisis

Of the two programs, Medicare presents the greatest challenge to Congress and taxpayers. The Hospital Insurance Trust fund is projected to be exhausted by 2018, a change from the previous date of 2020, and the cost of the Supplemental Medical Insurance program (SMI) is increasing faster than Medicare trustees had projected. According to the trustees, Medicare’s long-term debt, based on a 75-year actuarial projection, is now estimated to be $32.4 trillion. Of that amount $8 trillion is directly attributable to the Medicare prescription drug entitlement. The trustees did revise the size of the Medicare portion of the debt, which was estimated at $8.7 trillion in 2005, because the drug costs have risen more slowly than projected, as have the rates of enrollment. What is unknown is the extent to which employers, who now get federal subsidies for maintaining approved drug coverage for retirees, will continue to maintain that coverage or drop it with the passage of time. Accordingly, the cost of Medicare’s drug entitlement remains a huge uncertainty.

We need to raise the retirement age and make more old age benefits need-based.

Medicare accounts for about three quarters of the federal taxes that will go to the combination of Medicare and Social Security

Current and future taxpayers will be faced with enormous burdens in trying to sustain the Medicare program as it is today. According to Dr. Saving, without any change in the program, Medicare will consume a larger share of federal income taxes, rising to 23.1 percent of all federal income taxes by 2020 and 37.5 percent of all federal income taxes by 2030.

We will feel a big financial pinch long before Social Security or Medicare run out of money because the Social Security surpluses used to fund deficits in the regular budget won't be there anymore.

What most reports will miss is that Congress will have to start to deal with reduced surplus Social Security tax collections much faster than it or the public expect. Starting in 2009, the roughly $100 billion annual Social Security surpluses that Congress has been borrowing and spending on other programs will begin to shrink. From that point on, Congress will have to find other sources to replace the money that it annually borrows from Social Security or reduce spending. The surpluses will end completely in 2017, the year when Social Security begins to spend more than it takes.

In a little more than 15 years, today’s $100 billion annual Social Security surplus will turn into a $100 billion annual deficit—a $200 billion change. From 2017 on, Social Security will require large and growing amounts of general revenue money in order to pay all of its promised benefits. Even though this money will technically come from cashing in the special issue bonds in the trust fund, the money to repay them will come from other tax collections or borrowing. Moreover, the billions that go to Social Security each year will make it harder to find money for other government programs such as Medicare.

The pressure to cut spending in other areas will become intense. Want a manned space program to Mars? Fuggedaboutit.

The worsening finances of the US federal government is going to become the biggest cause of political battles in the United States in the next decade. The conflict will sharpen conflicts along racial, class, and generational lines. The younger generation of Hispanics won't rise to white levels of income. So they won't be providing the tax revenue needed. At the same time, they will be making bigger demands on entitlements programs due to their lower levels of income, higher rates of illegitimate births, lower rates of medical insurance coverage, and other problems. As the older whites retire the average level of productive capability of American workers will decline and the retirees will go from net taxpayers to net benefits receivers.

Forget about our elected "leaders" trying to get ahead of this problem. They'll continue in their reactive mode and respond only when they can't avoid responding any longer.

We need to deport all the illegal aliens and adopt a restrictive immigration policy that allows in only highly productive people who will earn high incomes and pay far more in taxes than they receive in benefits. We also need to accelerate the development of rejuvenating medical treatments that will slow and reverse aging so that people can work many more years. Treatments to enhance cognitive function would also help boost economic growth and make the unfunded old age entitlements liabilities more affordable.

Taxes will not go up enough to pay for all the promised benefits. The existing entitlements programs will see benefits reductions. The working age taxpayers will oppose tax rises large enough to pay for the promised benefits. But taxes will go up some. It is not clear to me how high taxes will go. Expect to see a big push for value added taxes as a way to fund the old age entitlements. My advice is to vigorously oppose the VAT since it will not replace income taxes but rather will function to increase the total percentage of output diverted into government treasuries.

Share |      By Randall Parker at 2006 May 01 09:29 PM  Economics Demographic

John S Bolton said at May 2, 2006 1:39 AM:

Giving social security to those of above average wealth or income, is what the left wants, and what the right should not want to keep. Be divisive! The rich should resent every increase in these programs; they should be welfare. Otherwise, it's too easy for there to be broad public support for ruinous growth of public expenditures.
The increase of these programs is an increase in aggression on the net taxpayer, an obvious aggrandizement of evil.
Let the old and sick run up their medical bills and take it out of their estates.
Then there will be an incentive for heirs not to facilitate wastrel attitudes on medical expenses.

Ned said at May 2, 2006 5:56 AM:

I agree. People who work hard all their lives and pay lots of taxes should not be penalized for their success by denying them benefits at retirement. What a great disincentive! These enormous deficits and unfunded entitlements are leading the US down the road to perdition. Of course, the politicians who vote for this nonsense know they won't be in office (or maybe even alive) when the crash comes. They'll leave it to their successors to clean up the mess they've created. If you want to see where we're headed, just look at western Europe - high taxes, lots of poorly funded entitlements, economic stagnation, little new job creation. If there is any benefit, we will not be able to afford much of a military, which sholud put a check on the reckless adventurism which has characterized US foreign policy for the last 50 or so years.

RueHaxo said at May 2, 2006 9:50 AM:

Social Security, at the least, should be means tested. It's ironic how liberals scream "No tax cuts for millionaires" but they fight tooth and nail for Donald Trump and Bill Gates' right to a Social Security check. Better yet, adopt Charles Murray's proposal: $10,000 per year per adult. After that, you're on your own.

D Flinchum said at May 2, 2006 2:19 PM:

One thing that we can do for Social Security is put a halt to the totalization agreement that GWB and Fox signed and that most US citizens have never heard about.

Have you ever read an article that discussed the totalization agreement signed by Bush and Fox but not yet presented to Congress? I am an avid reader of newspapers and magazines and I have never seen it mentioned in the MSM; and yet it will drastically affect a subject near and dear to US citizens' hearts, especially if they are over 50: their Social Security benefits. What it does is to allow Mexican immigrants - even illegal immigrants - who have paid social security taxes to make claims on the SS fund even if they are living in Mexico and are not US citizens. They will qualify after a much shorter time than US citizens do and will be able to claim money paid under fraudulent SS#'s. As we know, this will open claims up to an enormous amount of fraud. People can work a relatively short time, pad it out with fraudulent documents, and go home to Mexico with a claim to SS benefits.

How much will this cost? We have no idea and won't until after it is passed because we don't know who or how many will qualify - now and in the future. We do know that lower income workers tend to make out better under SS than higher income workers, and most Mexican workers will be lower income workers. The claims could go into the billions especially if we open up a huge guest-worker program like the ones being discussed now.

How can we guarantee that it will not be raided by false claims, such as the family of a person collecting benefits long after that person dies or a young healthy person claiming disability and collecting for years while working in Mexico? We probably can't. They will be living in Mexico, and Mexico doesn't have any reason to help us cut off funds flowing to its citizens from the US government. Quite the contrary.

When will it be passed? My guess is only after a major amnesty law has been passed. Then Bush can present it to Congress and unless one or both houses of Congress actually rejects it within 2 or 3 months, it becomes law. In short, the US public will likely not even be made aware of a situation that could drain billions from the SS fund.

Remember the outcry when Bush proposed allowing private savings accounts with part of the SS payments? At least that was US citizens' funds. Is this totalization agreement something you think the US public might care about? Not if they don't know about it.

I paid SS taxes for close to 40 years and maxed out for about 15 or more of those years. I'm 59 and if I die before I qualify for benefits, all of what I paid disappears. This is OK by me in that I made an agreement with the US government. I could have become disabled or done less well financially than I have; however, I did not make any agreement with any entity that I would fund Mexican citizens, nor, I suspect did most US citizens.

Robert Rosenthall said at August 8, 2008 7:54 PM:

The entitlements , welfare and funds for the long running war can NOT be fixed in 4 years be the REP or DEM
No President can fix the financial problems of the USA in 4 years. We all will pay with too meny federal programs cits.
Robert Rosenthall

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