Diminishing Trust-Fund Returns
Aug 02, 2017
This is a good time to publish reports on the performance and prospects of the federal government. Sending them out when much of the nation is at the seashore or the mountains is entirely natural if the goal is avoidance of responsibility.
The annual trustees’ report cards for Social Security and Medicare have been coming out later and later—not because the calculations are so hard to make, but because the bottom lines are so hard to accept.
Americans who work for wages or are self-employed pay Social Security and Medicare taxes; virtually all Americans who survive to the minimum retirement ages (62 for Social Security and 65 for Medicare) also will become beneficiaries of the two programs.
So nearly all citizens should wonder if the money going into the programs can pay the benefits going out. They already have come to doubt the honesty and veracity of at least half of the politicians who are supposed to maintain the systems.
Unfortunately, the virulent partisanship that has infected the politically active electorate leads people to believe that their party’s statesmen are on their side and the other party’s pols are to blame for all of the messes. They are wrong: Financial mismanagement is the last refuge of bipartisanship. U.S. lawmakers can’t agree on much, but they can agree not to repair entitlements.
Social Security’s retirement and disability programs have reserves, which the government calls trust funds, to back up their tax revenue; Medicare’s hospital insurance has a similar reserve fund. These were built up in the years when tax revenue exceeded the cost of benefits. Compound interest was also on the side of the beneficiaries, because the reserves were invested in Treasury bills, notes, and bonds, and the funds received interest from the Treasury.
Nowadays, however, there are 57 million Medicare beneficiaries and 61 million Social Security recipients, and both populations are growing rapidly. The cost of health care per Medicare beneficiary is growing even faster.
Tax revenues don’t cover the cost of benefits, and the trust funds are shrinking. The interest payments from the Treasury are also shrinking, because they are being used to provide an illusion of fiscal stability.
The report card for Social Security notes that there was $2.8 trillion in its two trust funds at the end of 2016, but it estimates that the funds will be depleted in 2034. Medicare’s Hospital Insurance trust fund had $199 billion and will be depleted in 2029.
Unless Congress raises revenue for the programs, spending on Social Security and Medicare hospital insurance will be limited to the amount of taxes collected for them. On the current estimates, Medicare would reduce payments to providers by 12% in 2029 (affecting 80 million Americans), and Social Security would cut benefits across the board by 23% in 2034 (affecting 87 million Americans).
Make no mistake, the benefit cuts are current national policy. They need no act of Congress to be imposed. Social Security and Medicare cannot borrow money to pay full benefits. Though many beneficiaries believe they deserve to receive full benefits, they will be shortchanged unless Congress provides new revenue or new borrowing power.
Perhaps Congress will find a way to borrow the money, as long as people and institutions from New York to Shanghai are willing to lend to the world’s greatest spender and debtor. It has worked so far, right?
These facts have been published for many years, but the problems were not addressed when solutions could have been easier to finance. Congress could have increased payroll-tax rates, lifted the income cap on those taxes, reduced benefits, or raised the age of eligibility for benefits.
Such measures could have been introduced gradually and caused little pain, but just mentioning such ideas makes American politicians run for cover. They are quite sure that their opponents in the next election will sound the trumpet of doom and that voters will not accept any sacrifice.
Those politicians know their constituents, and because of them, there seems to be no solution to the entitlement stalemate.