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This is not to say that some seniors aren’t seriously struggling. But to assert that younger Americans benefit from having the government take money from their current wages and give it to their parents obfuscates obvious points about where that largess comes from—and whether it will exist when today’s 50-, 40-, or 30-year-olds retire.
Given their failure to successfully pass a run-of-the-mill annual budget for the last three years, it’s not surprising that Congress and the president lack the courage to confront the apocalyptic structural problems of old-age entitlement programs. Social Security and Medicare together represented about 37 percent of total federal outlays in fiscal year 2011, according the Congressional Budget Office. In 2020, absent the sort of changes routinely dismissed by members of both parties as grotesquely inhumane and politically impossible, that figure will jump to 44 percent. Based on current trends, the two old-age entitlements will account for half of all federal outlays by 2030.
Social Security’s various trust funds, according to its own trustees, will be depleted of all reserves by 2033 and won’t be able to take in anywhere near enough cash to pay its obligations. Medicare’s major trust fund, which covers hospital benefits, is scheduled to run dry in 2024. In addition, both programs already contribute to the deficit due to massive borrowing that will only get bigger and more expensive. Contrary to common belief, the various trust funds for Social Security and Medicare aren’t filled with gold coins or even the money collected from taxpayers over the years. Instead, they are filled with IOUs or promises by the government to pay back whatever has been taken. By law, the trillions of dollars in taxes collected above what was needed to pay for benefits has been invested since the ’80s in interest-bearing government securities. Of course, the federal government doesn’t have that money anymore because it’s been spent on defense, stimulus, education, green jobs, and more. Yet the trust funds are not purely an accounting fiction, as is widely claimed; they are actual assets that the government has borrowed against and, as such, represent liabilities.
These programs, then, are the very definition of unsustainable. They pay out more than they take in and cannot exist without constant tweaks, fixes, and adjustments—all of which point toward a future of higher taxes for workers and smaller or nonexistent benefits for retirees.
Yet when leading politicians deign to mention Social Security and Medicare, it’s never to seriously confront their disastrous trajectories, but rather to guarantee the programs’ survival while impugning the barbarous motives of their electoral rivals. Presumptive GOP presidential candidate Mitt Romney—routinely assailed by Democrats as a heartless plutocrat who will turn old people out in the streets—stresses that Medicare is sacrosanct and blasts President Barack Obama for “taking a series of steps that end Medicare as we know it.”
Social Security was created in 1935 as a way of supporting Americans in their old age. The first checks were cut in 1939. The program is widely regarded as the signature achievement of the New Deal. Conservatives such as Barry Goldwater and Ronald Reagan groused about Social Security throughout the 1950s and early ’60s. During his famous 1964 nominating speech for Goldwater, Reagan asked, “Can’t we introduce voluntary features that would permit a citizen to do better on his own?…We are against forcing all citizens, regardless of need, into a compulsory government program.”
Yet by the 1980s, President Reagan called preserving “the integrity of the Social Security system” the “highest priority of my administration.” In an era of bitter partisanship and division, “one point that has won universal agreement,” Reagan declared, was that the entitlement “must be preserved.” He tweaked the system by increasing payroll taxes and slightly increasing the age at which benefits would kick in for people currently paying into the system. He left the benefits of current retirees untouched.
Medicare, which subsidizes health care for the elderly, joined Social Security in 1966 as the nation’s other entitlement specifically for seniors. Both programs have changed substantially over the decades, covering ever more types of people and conditions and expanding in cost and scope beyond the wildest imagination of their initial backers. When Medicare started, its supporters estimated that the program would cost $12 billion in inflation-adjusted dollars in 1990. The actual inflation-adjusted price tag came to $107 billion.
The two programs share a technical problem: There is no way to reliably pay for them as they currently exist. The taxes—and the people who will generate those taxes—aren’t there now, and there is no reason to believe they will magically appear anytime during the next half-century. Social Security is already in cash-flow deficit, meaning current taxes are not enough to cover current payouts. Each month the accounting surplus built up over years past, held as government securities, is drained a bit more. The payroll taxes earmarked for Medicare (1.45 percent of wages collected on both the employee and employer side), together with the premiums and state transfers, never fully covered the program’s costs even before the massive, unfunded expansion to cover prescription drugs enacted in 2003 under President George W. Bush.
But as serious as the two programs’ fiscal flaws may be, the more basic problem is ethical. When Reagan negotiated what he called “a new lease on life” for Social Security in the early 1980s, he said the reforms would guarantee nothing less than the “present and future well-being of every man, woman, and child in America, and generations yet unborn.” That’s not only gross political overstatement. It fudged all questions about whether living children and “generations yet unborn” should during their leanest years as workers be forced to pay for a system that Reagan himself had assailed just two decades earlier.
The Myth of Mandatory Spending
Social Security and Medicare are part of what’s called “mandatory spending,” or federal spending that is automatically continued under current law without the need for annual reauthorization. Social Security, Medicare, and Medicaid, which provides health insurance for the poor, comprise by far the largest portion of mandatory spending in the budget; other items in the mandatory category include federal retirement funds, food stamps, veterans’ benefits, and the earned income and child tax credits. The other major category in the federal budget, known as “discretionary spending,” incudes items such as homeland security, most military spending, farm subsidies, and aid to schools. Discretionary spending is what gets haggled over in annual budget negotiations. In 2011, mandatory spending accounted for 56 percent of total outlays while discretionary spending accounted for about 37 percent. The remaining 7 percent of outlays is mostly net interest.
But the terms mandatory and discretionary are misleading at best and mendacious at worst, as all spending is open to negotiation, to increases and cuts. If President Obama is at all serious when he repeatedly describes the government’s fiscal trajectory as “unsustainable,” addressing old-age entitlements must be part of any attempt to reduce expenditures.
In 2011, according to the Congressional Budget Office, the country spent $725 billion on Social Security, the single largest spending item of the year. The Social Security Administration says it will give checks to over 56 million Americans in 2012. While recipients include some dependent children and disabled workers, the largest bloc (36 million) is retirees. Retirees receive an average of $1,229 per month, with a maximum benefit of $2,500.