August 23, 2014

Concord Coalition Warns that Focus on Trust Fund Solvency Ignores the Key Long-Term Issues

WASHINGTON -- With today's release of the 2005 Social Security and Medicare Trustees Reports, The Concord Coalition stressed that while the numbers have not changed much, we are now a year closer to the Baby Boom's retirement with its enormous fiscal challenge. That is why The Concord Coalition urges elected leaders, the public and the press not to focus undue attention on trust fund “solvency,” which is a matter of government bookkeeping, while ignoring what really matters -- sharply growing projected costs that can only lead to steep tax hikes or unsustainable deficits in the future. Both parties should reject the “Do Nothing” and “Free Lunch” plans that rely on substantial long-term borrowing to appear painless.

The Concord Coalition has consistently warned that trust fund solvency is a poor indicator for Social Security's and Medicare's fiscal outlook because it is unrelated to the cost of future benefits or our ability to afford them. According to the Trustees report, the cost of Social Security and Medicare will grow from nearly 7 percent of the economy today to around 14.5 percent by 2040. To put that number in context, if we spent 14.5 percent of GDP on these two programs today they would consume about 90 percent of all federal revenues.

“The magnitude of our entitlements cost challenge should not be minimized by trust-fund accounting. This indicator not only misleads the public about the timing and magnitude of the looming fiscal burden, it says nothing about these programs' impact on national savings and generational equity. Trust fund solvency also says nothing about how society will meet the growing fiscal burden reflected in these projections. Because the trust funds are primarily an accounting device for keeping track of the programs' claims on general revenues, their existence does not ease the burden of paying future benefits,” said Concord Coalition Executive Director Robert L. Bixby.

“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 $353 billion in today's dollars to redeem its dwindling supply of Treasury bonds. That amount is more than the total of all 2004 non-defense discretionary appropriations excluding spending on veterans benefits and homeland security. Closing the gap in 2041 upon trust fund bankruptcy would require a payroll tax hike of more than one-third or cutting benefits to 74 percent of those currently promised. These are the consequences of pursuing a ‘do nothing' strategy,” Bixby said.

“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, as it already has 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 $9 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. 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,” Bixby said.

The Concord Coalition is a nonpartisan, grassroots organization dedicated to balanced federal budgets and generationally responsible fiscal policy. Former U.S. Senators Warren Rudman (R-NH) and Bob Kerrey (D-NE) serve as Concord's co-chairs and former Secretary of Commerce Peter Peterson serves as president.

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CONTACT:
Tristan Cohen
(703) 894-6222
communications@concordcoalition.org