Volume III, Number 6
April 28, 1997
The 1997 annual reports of the Social Security and Medicare Trustees,
released late last week, are similar to the 1996 reports. The main thing
that's changed is that we are now a year closer to the Baby Boom's
retirement and fiscal collapse.
- The Trustees still project that Social Security benefits will exceed
earmarked tax revenues starting in 2012 and that the system's trust funds
will go bankrupt in 2029. It is the earlier date that is fiscally
relevant. Since Social Security's trust-fund "assets" consist of nothing
but Treasury IOUs, they can only be redeemed if Congress cuts other
spending, hikes taxes, or borrows from the public to raise the cash. By
the time it goes bankrupt in 2029, Social Security will already be
running an annual operating deficit of $615 billion and tax revenues will
cover just 75 percent of benefits, slightly less than the 77 percent
projected last year.
- The Trustees still project that Medicare's Hospital Insurance (HI)
trust fund is headed for bankruptcy in 2001. HHS Secretary Donna Shalala
tries to put a positive spin on this news by noting there's still $120
billion in the fund-- enough to cover "all claims in the near future."
Unfortunately, this is only true on paper. What matters fiscally is HI's
operating balance. In 1997, this balance will be a deficit of $26
billion; over the next few years, the HI shortfall will grow
rapidly --adding $56 billion annually to the federal deficit by 2001.
- The Trustees still project that HI's sister program, Supplementary
Medical Insurance (SMI), will grow twice as fast as the economy.
"Bankruptcy" is not an issue with SMI -- but only because its general
revenue subsidy automatically rises to plug any gap between program
expenditures and beneficiary premiums. From 1997 through 2001, the
taxpayer subsidy to SMI will grow from $58 billion to $89 billion
- The Trustees still project that when the age wave rolls in the total cost
of Social Security and Medicare will double as a share of workers'
taxable payroll-- from 17 percent today to 35 percent by 2040. The official
projection, moreover, may be optimistic. According to an alternative
"high-cost" Trustees scenario whose assumptions about future trends in
productivity and longevity more closely reflect recent historical
experience, the combined cost of Social Security and both parts of
Medicare will explode to 55 percent of payroll.
- The Trustees still project that Social Security's actuarial deficit is
2.2 percent of taxable payroll. In theory, this is the amount that taxes
would have to be raised, starting today, to keep Social Security's trust
funds "solvent" for a full seventy-five years. Other things being equal,
the actuarial deficit in this year's report would have risen to 2.3
percent of payroll as another long-term deficit year loomed within the
Trustees' time horizon. But the Trustees also increased their real
interest rate assumption, which inflated the value of Social Security's
mythical trust fund. Social Security's actuarial deficit will almost
certainly rise to 2.3 percent of payroll next year-- and it will keep
rising by nearly 0.1 percentage points every year thereafter.
Congress must act soon to avoid fiscal tragedy. Otherwise, when Boomers
start retiring, their children will owe their soul to the company store.
FACING FACTS AUTHORS: Neil Howe and Richard Jackson
CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips
The Concord Coalition web pages were designed by Marla Parker and
These pages are now maintained by Craig Cheslog.
Last updated: 28 Apr 1997