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Long-term Medicare & SS deficit tops $63 trillion

Associated Press Published: April 23, 2012

Medicare and Social Security, the nation's two largest programs, have long-term deficits of $63.3 trillion, according to annual reports from the programs' trustees released today. The reports underscore the dire need to reform the programs if the nation wants to avert a fiscal crisis.

Though most news reports will focus on the trust fund exhaustion date (2024 for Medicare and 2033 for Social Security) the reality is that the trust fund is a farce. The Social Security program is financed primarily by payroll taxes. When the amount of tax revenue collected exceeds benefits, the surplus is theoretically put in the trust fund. But in reality, the federal government uses that surplus to finance ongoing government operations, and puts a stack of bonds -- or IOUs -- in the funds instead. Ultimately, the money to fund Social Security and Medicare has to come from American taxpayers one way or another, regardless of whether there's a paper "surplus" in the trust funds. A better way to assess the actual budgetary impact of the programs is to look at the deficits they are projected to run. And according to the trustees' reports, they're going to run deficits as far as the eye can see.

"In 2011, Social Security’s cost continued to exceed both the program’s tax income and its non-interest income, a trend that the Trustees project to continue throughout the short-range period and beyond," the Social Security trustees wrote. Though the payroll tax holiday accounted for a large chunk of the deficits in 2011 and 2012, the program still would have run a deficit had it not passed.

As for Medicare, the trustees wrote of the program's core hospital insurance benefit, "Beginning in 2008, expenditures exceeded income, and the Trustees expect this situation to continue throughout the projection period."

The trustees offer projections for the program's anticipated deficits through the 75-year time frame and an "infinite horizon" (given that the 75-year estimates include taxes collected from workers without taking into account the cost to government once they become retirees). I've broken down both sets of numbers in the chart below, which show a combined long-term deficit of $63.3 trillion. Keep in mind that this assumes that certain Medicare cuts go into full effect. For instance, the trustees assume that physician payments get cut by 30 percent in 2013, even though they acknowledge that, "it is a virtual certainty that lawmakers, cognizant of the disruptive consequences of such a sudden, sharp reduction in payments, will override this reduction just as they have every year since 2003." It also takes as a given that all of the Medicare changes in President Obama's health care law will go into effect exactly as written. Of course, Obama's projected Medicare cuts don't actually extend the solvency of Medicare in reality, because the money is already slated to be spent to help finance Obamacare's $1.76 trillion in spending.

Though it's difficult to grasp numbers so large over such a long time period, it's worth keeping in mind that investors deciding whether or not to purchase U.S. bonds take into account the nation's long-term fiscal picture, and thus could choose to stop buying Treasuries a lot sooner than an actual crisis is projected to hit, driving up borrowing costs dramatically. It's also important to realize that the sooner we take action to reform these programs, the easier it will be to phase in changes to avoid massive tax increases that will crush the economy and much more disruptive cuts. Unfortunately, with a predictable crisis staring us in the face that promises to wreck the futures of younger Americans, Obama has spent his first term avoiding dealing with the problem so he has a free hand to attack his Republican opponents.

Click to read full article at Washington Examiner