Program deficits are already escalating. Last week, the Social Security and Medicare trustees revealed that the trust funds will cover full benefits until 2031 for Medicare, and 2033 for Social Security's Old Age and Survivors Insurance (OASI) program. These insolvency dates, which had been estimated at 2028 and 2034 a year ago, feed the faulty assumption that Social Security and Medicare benefits are fully funded for the near future, and thus reform is less urgent.
In reality, Social Security and Medicare continue to run large and growing deficits, and the trustees' dates have limited economic relevance. The first problem is that these insolvency dates apply only to Social Security and Medicare's hospital insurance program (Part A). Excluded from the solvency calculations are Medicare's physician (Part B) and drug (Part D) programs, even as they run a $447 billion cash shortfall this year that will surge past $1 trillion in a decade. The second problem is that the Social Security and Medicare trust funds — while representing a legal promise to pay benefits — contain no economic assets and therefore save current taxpayers no money.
From 1983 through 2009, the Social Security system collected $3 trillion more in payroll taxes than it spent in benefits. Instead of saving this surplus for future shortfalls, it lent the money to the Treasury to spend. Now that the Social Security system is in deficit, it is legally allowed to take back $3 trillion (plus interest) from the Treasury (i.e., current taxpayers) until the score is settled, which will occur in 2033. At that point, Congress would likely continue financing Social Security with the same annual deficits.
Social Security's trust fund balance is merely an accounting device that shows how close the Social Security system is to completing the promised $3 trillion revenue transfer from the Treasury.
Yes, the Social Security trust fund is invested in government bonds, which makes it an asset for the Social Security Administration. But that also makes it a liability for the Treasury — and the taxpayers — who are on the hook for repaying the $3 trillion. In that sense, the trust fund does not save taxpayers a dime. Every dollar of annual Social Security and Medicare costs is financed by concurrent taxes and deficits — regardless of whether we call the borrowing from the public paying down the trust fund.
This year, the Social Security and Medicare systems will spend $2.3 trillion in benefits and collect $1.7 trillion in payroll taxes and health premiums. The resulting $649 billion shortfall will be borrowed and added to this year's budget deficit. Most of this shortfall is driven by the aforementioned Medicare physician and drug programs that are not even included in the trustee solvency dates.
As 74 million baby boomers retire and health-care costs continue to expand, these shortfalls will drive budget deficits steeply upward. The Congressional Budget Office projects that, a decade from now, Social Security and Medicare will spend $4.4 trillion in annual benefits, while collecting only $2.7 trillion in premiums and payroll taxes. That $1.7 trillion shortfall will account for most of Washington's projected $2.9 trillion budget deficit for that year. And the remaining share of the deficit will be driven by soaring interest costs directly resulting from these two program shortfalls. Given that the CBO optimistically assumes that the government-paid interest rate tops out at just 3.2 percent over the decade, those interest costs may far exceed projections.
It gets worse. Over the next 30 years, Social Security and Medicare are projected by the CBO to spend $156 trillion in benefits but collect only $87 trillion in payroll taxes and premiums. This $69 trillion cash shortfall will have to be financed by budget deficits, which will in turn be responsible for $47 trillion of interest costs on the national debt.
In sum, Social Security and Medicare will drive $116 trillion in budget deficits over the next 30 years, according to CBO data. The rest of the federal budget is roughly balanced across these three decades. This staggering shortfall also shows why even saving the $3 trillion Social Security trust fund would not have made much of a difference, as the demographics and escalating health-care costs are too much to overcome. Paying all promised benefits would require both imposing a value-added tax that gradually rises past 20 percent, and gradually raising the payroll-tax rate to 24 percent (no, applying Social Security taxes to all wages is not close to sufficient). This would leave little room to raise taxes to finance any other new social spending.
Reform is never easy, yet averting such crippling tax hikes can be best accomplished by gradually phasing in reforms such as higher eligibility ages, benefit trims for upper-income seniors, and health-care efficiencies. Delay only locks in higher benefit levels and deeper government debt, which makes the inevitable future reforms deeper and more drastic.
Social Security and Medicare can be made sustainable for future generations. But we should not be lured into complacency by barely relevant trust-fund insolvency dates.
Brian Riedl is a senior fellow at the Manhattan Institute.