October 31, 2014

CONCORD COALITION WARNS THAT FOCUS ON SOCIAL SECURITY AND MEDICARE TRUST FUND SOLVENCY IGNORES THE KEY LONG-TERM ISSUES

WASHINGTON--The Concord Coalition warned today that the 2002 Social Security and Medicare Trustees Reports released this week reaffirm that both programs are on an unsustainable course - despite three additional years of trust fund solvency for Social Security and one additional year of solvency for Medicare. The future is even more problematic because the President and Congress are again spending near-term payroll tax surpluses of both programs rather than saving them for the long-term financing gap.

“It means nothing to build up a bigger stack of Treasury IOUs when we are doing so little to help future generations afford the cost of paying them off. Unfortunately, with the budget headed back into deficit and reform of Social Security and Medicare on the back burner that is exactly what's happening - bigger debts and squandered surpluses. The overall challenge has not changed. What has changed is that we are back to spending the Social Security and Medicare surpluses on other government operations. This amounts to a breach of faith, not with the elderly who are already receiving benefits, but with working-age men and women who are now paying about $600 per worker more in payroll taxes than are needed to fund every penny of benefits. We should not pretend to save this money for tomorrow by crediting IOUs to a government trust fund while we use the cash to give ourselves bigger government and lower taxes,” said Concord Coalition Executive Director Robert Bixby.

The Concord Coalition has consistently warned that trust fund solvency is a false indicator of Social Security's and Medicare's fiscal outlook because it is unrelated to the cost of future benefits or to the manner in which sufficient resources will be found to afford this cost. According to the Trustees report, the cost of Social Security and Medicare will grow from nearly 7 percent of the economy today to over 12 percent by 2040. Also by 2040 the share of general revenues needed for Social Security and Medicare will grow to over 40 percent. Fiscally and economically, what matters is not the trust fund balance but the operating balance - that is, the annual difference between outlays and dedicated tax revenues. For example, in 2040 the Social Security trust fund is projected to be fully “solvent.” But in that year alone the program will need a general revenue infusion of about $360 billion in today's dollars to redeem its dwindling supply of Treasury bonds. That amount is more than the entire 2001 budget for national defense. Closing the gap in 2041 upon trust fund bankruptcy will require a payroll tax hike of more than one-third or a benefit cut of 27 percent.

“These programs must not be viewed in isolation, either from each other or from the overall federal budget. The same bonds that are assets for Social Security and Medicare are liabilities for the Treasury. Once the cash flow turns negative, in 2017 for Social Security and 2016 for Medicare Part A, the Treasury will have to begin redeeming the trust fund bonds by raising taxes, cutting other programs, or running up the public debt. This will cost over $8 trillion in today's dollars through 2040. Our focus must be on how much these programs are going to cost over the long-term and how future taxpayers are going to pay for them. Trust fund solvency does not address either of these key issues. It is simply a matter of government bookkeeping. The bottom line is that it will take a combination of fiscal discipline and cost saving reform to put Social Security and Medicare on a sustainable path for all generations. Policymakers in Washington are not pursuing either strategy. They are pursuing the Do Nothing Plan,” Bixby said.

Appendix: Charts (Requires Adobe Acrobat Reader)
Chart 1: Social Security and Medicare Part A Cumulative Cash Deficits in Constant 2002 Dollars 2002-2040
Chart 2: A Growing Tax Burden