Aging

Medicare and Social Security Tabs Coming Due

Unless we want to drown future generations in a sea of red ink, we need to have a serious conversation about the future of entitlements.

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The national debt has dropped out of the headlines recently, but that doesn't mean that it has gone away.   In fact, just a few weeks ago, the debt officially topped $18 trillion. For those keeping score, that equals roughly 101 percent of GDP. In other words, we now owe more than the value of all goods and services produced in this country over a year. And, according to the Congressional Budget Office, the debt will climb to almost $27.3 trillion within the next 10 years.

Moreover, as Milton Friedman, pointed out, debt, like taxes, is just a measure of how we pay for the true cost of government, which is spending. That spending is currently on a path to reach 36 percent of GDP by mid-Century. That's just federal spending. Throw in state and local governments and government is soon expected to consume more than half of GDP. 

As bad as these numbers sound, they actually understate the problem. That is because they don't include the unfunded liabilities of programs like Social Security and Medicare. While those liabilities don't show up on the country's official balance sheet, they nonetheless represent legal obligations of the US government.  Including the expected shortfall from those programs brings are true debt to an unfathomable $90.6 trillion. 

Yet, neither Democrats nor Republicans seem willing to face up to this problem.  Democrats either deny that there is a problem or insist that the problem could be solved if only the wealthy paid higher taxes. But even if one thought that tax increases were a good idea, and could be implemented without killing jobs or slowing economic growth, it is simply impossible to increase taxes enough to close the budget gap. In particular, raising taxes on the wealthy falls far short of what would be required to pay for our current and future obligations.  

Meanwhile, Republicans give frequent lip service to the debt crisis but pretend that you can deal with the debt crisis by eliminating "waste, fraud, and abuse" in the federal budget. Certainly, there is plenty of that, but you simply cannot balance the budget by cutting the usual suspects. Foreign aid amounts to less than 1 percent of federal spending.  Federal subsidies to Planned Parenthood and the Corporation for Public Broadcasting amount to a combined 0.02 percent.  

In fact, as President Obama proudly, and correctly, points out, even in his bloated budget, domestic discretionary spending would amount to just 2.5 percent of GDP by 2023, a historic low.  That is not to say we shouldn't cut those programs. Many are indeed wasteful. Some do more harm than good. Most would probably be better left to the private sector and civil society. Every dollar in savings is a good thing, but the sad fact remains that such cuts come nowhere near balancing the budget or significantly reducing the debt.

jasonEscapist / Foter

The simple truth is that there is no way to address America's debt problem without reforming entitlements, notably Social Security, Medicare, Medicaid, and our newest entitlement program, Obamacare.  Social Security, Medicare, and Medicaid alone account for 47 percent of federal spending today, a portion that will only grow larger in the future.   And although the spending for Obamacare has just begun, it too will soon consume an ever larger portion of the federal budget.  Entitlement spending, not domestic discretionary programs or defense, is where the real money lies.

Social Security will run a $69 billion cash-flow deficit this year. And that's the good news. Every year after, that shortfall will worsen. All together, Social Security is facing future shortfalls worth more than $24.9 trillion. The so-called trust fund is simply an accounting measure, specifying how much money the federal government owes the program out of general revenues, not an actual asset that can be used to pay benefits.  

Medicare is in even worse financial shape, despite the fact that health care costs have slowed in the past decade.  Economists debate whether the slowdown will continue, but even if it does, Medicare faces unfunded liabilities approaching $48 trillion.  And, if we return to double digit health care inflation, we could see Medicare's liabilities swell to more than $88 trillion.

We are far beyond the point where "tweaking" those programs—revising them around the edges, cutting a few dollars here, adding a little bit more in taxes there—will forestall the budgetary disaster lurking in our fiscal future.

Social Security and Medicare are generally seen as immune to reform, in large part because seniors, who vote, receive the benefits, while young people, who don't vote, get the bill. It is much easier for politicians to debate whether we should kill off Big Bird or make the rich pay their "fair share" of taxes.  But unless we want to drown future generations in a sea of red ink, we need to put away childish things, and have a serious conversation about the future of entitlements.

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67 responses to “Medicare and Social Security Tabs Coming Due

  1. While we need to address this issue, it is false that Social Security and Medicare are legal obligations. Court precedents have established that they are not, and benefits for both have in fact been legally reduced at times for some people.

    1. They are legal obligations.

      But they are legal obligations of a government, which are always susceptible to being nullified by that government.

      The law as it stands obliges the government to make welfare distributions. The government can always change the law.

      1. Old people vote. Therefore, while in theory the govt can change the law, in practice old people voting numbers will ensure that the currency goes tailspin well before any such act of Congress.

  2. Well, I have it on good authority by a “classical liberal” round these here parts that Obama has LOWERED the deficit. And – by extension – the national debt.

    You’re welcome. Sleep well, guys…

    1. LINE BY LINE, he went through finding spending reductions!!!!!

      1. And he did so with the speed and accuracy of Johnny Five.

    2. Not too good with math, are you?
      ANY deficit RAISES the national debt.
      The only way the national debt is lowered is through a surplus – spending less than revenue.

  3. Underwood was right all along…

  4. Yet, neither Democrats nor Republicans seem willing to face up to this problem

    I am pretty sure Paul Ryan tried to face up to the problem, at least with regard to Medicare, and he was brutalized for it including on the pages of Reason. And George Bush tried to face up to the Social Security issue and got nowhere and no credit for doing so.

    You may not have liked those plans, but they were at least attempts to address the problem. How many attempts to address the problem have Democrats made? Is there a single Democratic plan out there to deal with this? Not that I have seen. So, no, this is one time where the two parties are not quite the same.

    1. The Democrats have a plan: Keep bleeding the young who don’t vote to pay off the old who do vote. The real mistake that the Republicans have made is to try and fix something that is broken in just the right way to garner votes.

      Fixing is breaking, John. Not fixing is fixing. Politics.

      1. The problem is that, when the young bother to vote, they elect bozos who promise Hope’n’Change, unicorns, and rainbows.

        1. Why do you hate Unicorns so much ?

      2. You are aware that those “old” people have been paying for their entire working lives, aren’t you?
        To read this article, and a lot of the comments, one would think we are at the start of this pyramid scheme and the ones at the top, collecting their benefits, have come into a program that they never paid in to. This is patently untrue and to expect those, who have paid what was asked, to forego the promised benefits, so that “the program” will be able to pay off those coming along, later, is selfish, in the extreme.

    2. The Ryan plan was the equivalent of relaxing your foot on the gas pedal as you accelerate towards a cliff, just enough so you won’t be going as fast when you fly off of it.

      1. True enough. The projections were comically optimistic about unemployment rates and tax revenue as well. The Bush SocSec plan was much more ambitious. One of the few things he deserves credit for. The Republican party doesn’t get to share that credit though. They had a majority when he proposed it, and it was the Republicans who killed it in the cradle.

  5. “…neither Democrats nor Republicans seem willing to face up to this problem.”

    People love to repeat the cliche, “the definition of insanity is doing the same thing over and over and expecting a different result.” Then they go to the polls on election day, and vote for either for democrats or republicans.

    1. That’s because it’s your senators and representatives that are the problem, not my senators and representatives.

    2. Hey man, two part system. It’s the law, just ask anyone…

      I’ve actually had people try to convince me this was in the constitution and that it was a good idea. Handing them a copy of the constitution and asking them to show me wasn’t enough to break their conviction that it is the natural order of things.

      Freedom is slavery after all.

      1. “From each according to his ability, to each according to his need.” That’s in the Constitution, right? Isn’t it one of the Amendments?

  6. I’m good with drowning future generations in red ink.

    SEND ME MY CHECK!

    /average American

  7. While those liabilities don’t show up on the country’s official balance sheet, they nonetheless represent legal obligations of the US government.

    I think that’s false. They are not legal obligations, just promises. When the auto-cuts come in 2035 or whenever, you’re not going to be able to sue the government for more benefits.

    1. It’ll never happen.

      What will happen first is the government will seize all 401k and roth funds in the name of fairness
      and then issue a new and improved social security plan

      1. Exactly this.

  8. On the other hand Americans are willing to subject themselves to ridiculous inconvenience and spend billions to save the environment for “future generations” but better not touch their SS.

    I guess it’s a way to make sure someone’s here to pay for their benefits.

    1. Actually, when Americans are asked to spend billions to save the environment for “future generations”, in initiatives, they generally don’t want to.
      It is through electing representation with no consideration of the lengths some of them will go to “save” the environment, that this kind of spending happens.
      It is not unlike the “immigration issue”, the politicians don’t care what the majority want – they have completely different objectives and are happy that too many don’t put two and two, together.

  9. Hi Michael,

    Social security would be funded until the sun runs out of hydrogen if we just made people that earn $300,000/yr pay the same rate of taxes on social security as someone making 30,000/yr. I know this does not compute with right-wingers though who think hank rearden is a real person.

    1. Calculations plz.

        1. now try linking to a document that actually exists

              1. Eh, screw that bullshit.

                We should tax everyone the way we did in the glorious 50’s and 60’s, keep the income limits where they are, and just cut everyone’s SS taxes by 50% or so.

                That’ll fix it.

                1. Nah. We should go back to the policies of libertarian hero, Calvin Coolidge. How many months between when he left office and the stock market crash? Things go so well when we elect politicians that think the answer to everything is to turn it over to the likes of Donald Trump.

                  Right-wingers like to point out to me that no one paid those 90% rates on their income because of exemptions (psst, they paid more than they do now, though!). That’s a good reason not to try it out now?

                  1. If you want to keep getting excited about the idea of taxing rich people, be my guest.

                    It’s kinda pathetic. Why don’t you go do something with your life, instead of waiting for someone to tax the rich?

                    1. His name says it all.
                      Socialists – bitterly envious of the successful, entire life devoted to making them pay for it.

    2. Just out of curiosity, do you propose that self-employed pay “both” sides of SS/Medicare on income up to $300,000?

      1. Yes. Btw, that’s the number that was being pushed in this heritage foundation report. It’s fun reading– if only for its attempts at bullshit.

        http://www.heritage.org/resear…..rming-much

        1. Bullshit is taking into account the wide body of research on Laffer style effects? Not just cherry picking rosy numbers that allow you to say that eliminating the tax cap would solve all problems and that may or may not have any relation to reality? Actually attempting to account for the potential variance? Interesting analysis you have there.

        2. You are advocating slavery. That is evil. You are a malicious person. Why do you hate people who make more money than you? Do we have to put you out of your misery or what?

          1. I’m saying whomever wrote that report is a hack. You don’t go from being taxed at 30% when you make $110,000 to being taxed at 42% when you make$125,000. That’s not how SS taxes work.

    3. Naturally, raising taxes is the only possible solution.

      SocSec taxes are capped because SocSec benefits are capped. Are you proposing that the cap on bennies be lifted, too?

      1. They should just convert it into a minimum income payment for all, based on transfers from every worker, and be done with it.

        Why the government wants to take care of the elderly more than it wants to take care of children is beyond me…

        until I remember that children can’t vote.

    4. Keep that Ponzi scheme running!

    5. Flat tax with no exemptions would work for me.

    6. Hi amsoc

      Would you support giving people the choice to opt out of Social Security?

  10. So with conservative assumptions at a 6% interest rate on contributions I estimate that the government will have made $2.2M on the money I will have contributed to social security (assuming I actually get ANYTHING back when I retire). What the FUCK are they doing with all that money (like I don’t already know)?!

    1. What the FUCK are they doing with all that money

      Swimming a la Scrooge McDuck.

  11. “While those liabilities don’t show up on the country’s official balance sheet, they nonetheless represent legal obligations of the US government”

    But these kinds of shenanigans were enough to destroy Enron and Arthur Andersen.

    1. they nonetheless represent legal obligations of the US government”

      Actually, they don’t. They aren’t enforceable against the feds at all. These are purely political promises, which can be revoked at any time without legal consequence.

      1. Flemming v. Nestor ruled specifically on Social Security, not Medicare. Is there a similar precedent for Medicare? Or is the argument that the Court’s interpretation is a more general statement about the nature of property with regard to the Takings Clause?

      2. Public service pensions, not so much.

  12. Hi reason mag,

    Thanks for the new layout. I find the website to be much more readable and attractive than before.

  13. Argh even when you recognize the real problems the level of economic ignorance is astounding.

    In the first sentence you conflate the deficit with the debt. The debt has not fallen in either real terms since the 1960’s and not as a percentage of GDP since the 90’s (and even that was largely an illusion created by a bubble inflated GDP).

    When you mention that spending is going to go up to 36% of GDP you no longer need to factor in unfunded liabilities because you have accounted for it there.

    Stop giving politicians credit for spending falling relative to GDP, when you do you are perpetuating the false assumption that government spending should rise in parallel with GDP. It should not. GDP growth comes from 3 sources: inflation, population growth, and productivity growth. Spending should increase proportionally with inflation and some programs will increase proportionally with population growth but most will not and there is no legitimate reason that government should automatically capture a portion productivity growth. If gdp grew at 3% with 1.5% inflation, 0.5% population growth, and 1% productivity growth then government spending should only grow by somewhere around 1.6%, anything greater than that would represent a net growth in government spending.

    That means that government spending as a percentage of GDP SHOULD ALWAYS be falling and when it doesn’t we should be complaining

  14. Isn’t there something more important happening at SCOTUS today that Tanner should be attending, rather than posting at Reason?

  15. But… But… But Paul Krugman said this is a GOOD thing!

    The economy DEPENDS on it!

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    http://www.work-mill.com

  17. I wish Mr. Tanner would learn how our modern monetary system, with its fiat currency, actually works.

    This is not to say that living standards are not at risk in the future, but it’s wrong to discuss the potential problems within the framework of an entity with currency constraints. Households, businesses, states, and municipalities are currency constrained. The federal government is not. The risk is hyperinflation — NOT solvency.

    The challenge for the federal government is to spend (yes — print) at levels that don’t harm living standards significantly(cause hyperinflation). In the history of modern hyperinflations (the last 100 years), there have ALWAYS been other severe exogenous economic circumstances which lead to an increase in the money supply which lead to hyperinflation. Historically, those events tend to be: loss of a war, a collapse in production, rampant government corruption, regime change or collapse, or ceding monetary sovereignty generally via a pegged currency or foreign denominated debt.

    Perhaps the challenge to avoid hyperinflation can’t be met. If that’s what Mr. Tanner believes, then he should frame his concerns within the proper operational context. Otherwise, stop suggesting the federal government will run out of money. It wont.

    1. I read this complaint a lot, and I’m not sure it’s applicable. Yes, we get it, governments can just print money.

      However, if someone says that we’re going to save SS by raising taxes on high income earners, do you jump in to correct them, saying “Really, worrying about where you’re going to get money doesn’t make sense. We need to worry, instead, about hyperinflation.”

      At the end of the day, SS benefits need to get paid for. Either the benefits are going to get cut, or taxes are going to be raised, or the government is going to borrow, possibly from the Fed, printing money, in which case, the money will be directly pumped into consumer spending, possibly increasing inflation, and, yes, we should probably not do that in a way that causes hyperinflation.

      Or, in shorter terms, SS needs to be paid for, and how it’s going to be paid for hasn’t been determined. I don’t see any fiat currency denial yet.

      1. “Really, worrying about where you’re going to get money doesn’t make sense. We need to worry, instead, about hyperinflation.”

        Yeah, we should just abandon the program that has secured the retirement of hundreds of milions of Americans because of a tax increase that would affect no more than 5% of the population. Because… hyperinflation.

        1. Can you point out in my post where I implied that?

          Or, are you ranting with the libertarians that live rent free inside your head again?

          1. Wow, strange comment from “American socialist”. As to funding Social Security in the future, you’re correct that it will be paid for – in some fashion. I suspect it will be a combination of things, including tax increases, “cuts” in benefits, and money printing.

            That last item — money printing — brings the topic of fiat currency in to the conversation.

            I do worry about inflation — at least the truly harmful kind. I’ll say that’s another way of being concerned about how we’re going to pay for Social Security (and other entitlements).

    2. “there have ALWAYS been other severe exogenous economic circumstances which lead to an increase in the money supply which lead to hyperinflation. Historically, those events tend to be: loss of a war, a collapse in production, rampant government corruption, regime change or collapse, or ceding monetary sovereignty generally via a pegged currency or foreign denominated debt.”

      In other words, hyperinflation only happens when shit happens.

      For example: regime change? So, basically, democracy can cause hyperinflation.

      It’s not like we’re talking about impossible events here. It’s part of why this list is so long:
      http://en.wikipedia.org/wiki/H….._episodes.

      1. I would put “regime change” at a more extreme level of change than run-of-the-mill democracy.

        Here’s another paper on hyperinflation and its history:

        http://papers.ssrn.com/sol3/pa…..id=1799102

        And more on the topic from the same source:

        http://www.pragcap.com/underst…..rinflation

    3. LOL… so as long as we don’t engage in a nuclear war, have another War Between the States, abandon the central banking system, or adopt the Bitcoin as our national currency we’ll be ok.

      Do currency scolds also wear garlic necklaces around their neck? You can never be too careful, I say.

      1. Eh, “we’ll be fine” is a pretty low bar.

        I think the “inflation cult” is mostly victim of a strawman. People aren’t predicting hyperinflation, as much as inflation.

        The only reason we don’t have inflation now due to QE is that banks are using the new money as reserves and not lending it. Therefore, the money isn’t being used to purchase consumer goods, so inflation is staying relatively low.

        However, if the government decides its going to borrow money from the Fed to spend on SS, or any other spending, that hits the economy and goes into consumer goods, that will cause inflation.

        Will it cause hyperinflation? Probably not. However, it does show up as a hidden tax on people who have cash assets and who have fixed incomes pegged to the dollar. A rich person living off of capital gains just watches the price of his assets go up with inflation, but a person making a salary watches his buying power shrink. However, this also includes people living off of welfare payments pegged to dollars, and social security, too.

        So, at the point the government is managing debts and deficits by printing money, is the point at which they reduce the value of the welfare benefits. This is the primary reason why people advocate increasing taxes to cover SS, rather than just going loose money policy on it.

        So, yeah, we won’t have a disaster if we go loose money policy. Everyone’s SS benefits won’t be what they probably expected, but, eh, we’ll be fine.

        1. I hope you’re right. We agree (it seems) that the long term concern is living standards.

          One point you made isn’t correct (in my opinion). Banks don’t lend reserves (except to other banks). Banks are capital constrained, not reserve constrained. Reserves only go to 3 places: (1) to an entity with a Fed deposit account (Treasury, banks, IMF etc.), (2) withdrawn from commercial bank customer deposits as paper bills or coins, or (3) back to the Fed.

  18. I don’t think the political will for true reform will ever be there. Both programs are too needed by too many.

    The only path I see for social security is inflation, fewer COLAs, and frequent readjustment of the basis used to calculate COLAs. That way, it cannot really be said that people did not get what they were promised, as they will still get a check.

    Medicare is harder. The only path I see for it is legislation that makes acceptance of it mandatory, such that medicare has more power to dictate prices…essentially a kind of nationalization. That would probably favor the use of cheaper tests/medicines/procedures and the more common illnesses.

    I’m not happy about either of these things, as I see a drastic downgrade in lifestyle and quality of medical care, but both seem inevitable to me in the absence of true reform.

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