Don’t panic: Social Security and Medicare are far from broke, many long-term fixes available

When some politicians and organizations are calling for steep and immediate cuts to entitlement spending, it’s very difficult to tell sometimes whether they are making ideological or economic arguments.

Do they really want a more libertarian society in which the old and sick will get less support from the government? Are they reluctant to say that flat out and so have decided to couch their arguments in terms of economic necessity? Or have they simply been watching too much TV and too many commentators who are paid to rile up viewers by insisting that we’re always on the verge of some sort of crisis?

Ironically, of course, the vast majority of those talking heads on TV scoffed at the credible warnings about the housing bubble and the financial crisis — a real economic crisis.

Are they now trying to make up for that big miss by manufacturing new ones?

Or are Americans just bad at math?

It’s a curious problem.

Anyway, on to a few snippets from and comments about last Friday’s A SUMMARY OF THE 2013 ANNUAL REPORTS from the Social Security and Medicare Boards of Trustees.

First, I should note that there is one impending mini-crisis in Social Security funding: the Social Security Disability Insurance program’s trust fund will be depleted in 2016, according to the most recent predictions, and yearly income will not match outlays. Disability recipients will face significant cuts by the end of the decade.

But the other larger components of Medicare and Social Security face no impending crisis. And if the economy continues to improve and/or if we provide an easier path for foreign workers to become legal residents, we could see the projected path of the programs improve dramatically.

From the report:

Social Security and Medicare together accounted for 38 percent of federal expenditures in fiscal year 2012. Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment and, in the case of Medicare, to growth in expenditures per beneficiary exceeding growth in per capita GDP. In later years, projected costs expressed as a share of GDP trend up slowly for Medicare and are relatively flat for Social Security, reflecting very gradual population aging caused by increasing longevity and slower growth in per-beneficiary health care costs.

That sounds like a stark problem, but over the long term, neither Social Security nor Medicare is expected to eat up more than 7 percent of GDP:

Screen shot 2013-06-02 at 11.12.30 AM

Now, that’s a significant increase from where we are now, but it’s hard to see a crisis in that data anywhere.

There are four significant trust funds that we’re talking about here:
Social Security Disability Insurance — projected depletion 2016
Social Security Old Age and Survivors Insurance (what we generally mean by Social Security) — projected depletion 2033
Medicare Hospital Insurance — projected depletion 2026 (two years later than last year’s projection)
Medicare Supplementary Medical Insurance (included Medicare Part B and Part D) — balanced each year by federal law

But even if the trust funds are depleted in those years, the yearly income under current law will pay for a significant percentage of scheduled benefits:

The combined OASDI trust funds have a projected depletion date of 2033, also unchanged from last year’s report. After the depletion of reserves, continuing tax income would be sufficient to pay 77 percent of scheduled benefits in 2033 and 72 percent in 2087. […]

The projected HI Trust Fund depletion date is 2026, two years later than reported last year. Under current law, scheduled HI tax and premium income would be sufficient to pay 87 percent of estimated HI cost in 2026 and 73 percent by 2087.

So we face long-term issues, and I agree — sort of — with the authors of the report on this point:

While considerations of equity and adequacy will inevitably accompany any legislative effort to restore these programs to long-term financial balance, a broadly accepted solution becomes less likely the longer that financing corrections are postponed.

Given today’s highly polarized and ideological political climate, I’m not sure that now is the best time for this fight.

I’d take a few basic steps now, if I were in charge: begin some minor means testing of both SS and Medicare payments, raise the income cap for payroll taxes, etc.

But there’s a good argument to be made that we should wait before doing anything beyond addressing the Disability Insurance program. From a nice sober analysis in the LA Times:

1. There’s still no reason for panic in “fixing” Social Security. The projected depletion date for the Social Security trust fund is still 2033, the same as it was in last year’s report. If the projection comes true, there then would be be enough money coming into the system from the payroll tax and other revenue sources to cover about 77% of currently scheduled benefits.

But that’s 20 years off, and projections at that range are inherently uncertain. “Only time will tell how accurate or inaccurate our projections turn out to be,” said public trustee Charles Blahous, making a point that is almost always overlooked in the Social Security debate. But Blahous is the most hawkish trustee, and he segued instantly into an appeal that Congress act to close the projected deficit now. He did this by contrasting the cost of doing so today versus waiting until 2033.

But of course those aren’t the only two choices. It makes sense to wait at least several years for two reasons: The risk of making irrevocable but unnecessary changes in the program become higher with haste; and the scale of the problem to be solved — if there is one — will become clearer as time passes.

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