This week on Facing the Future, Jessica Riedl of the Manhattan Institute explained why Social Security and Medicare add to budget deficits even though many people believe that they pay for themselves through payroll taxes and premiums. The disconnect between perceptions and fiscal realities has made it difficult to enact reforms that would improve the financial position of both programs. According to this year’s Social Security and Medicare Trustees reports, the main Social Security trust fund (OASI) and the Medicare Hospital Insurance trust fund (HI), which covers inpatient services such as hospital stays, are both headed for insolvency in 2033, just eight years from now.
“Social Security and Medicare are victims of their own successes,” Riedl said. “They have become such a part of American life, especially for seniors, that it’s hard to fix them because people are so attached to their current structure.”
Riedl explained that trust fund accounting for Social Security and Medicare masks serious cash flow problems that put a strain on the rest of the budget. “What the trust fund ultimately means,” she said, “is that Social Security ran $3 trillion worth of surpluses between 1983 and 2009. As a result, Social Security is legally entitled to run an equal $3 trillion in deficits from 2010 until 2033. At that point, the trust fund has been fully repaid, and Social Security can’t run deficits anymore so it would have to cut benefits across the board If Congress does nothing.”
“The earlier $3 trillion in surpluses was never saved,” she noted. “It’s more like a credit to the account, but it means that Social Security is allowed to run deficits later and right now those deficits are real and they are contributing to annual budget deficits.”
With Medicare, Riedl pointed out, the main budgetary concern comes from the Supplemental Medical Insurance trust fund (SMI), which covers outpatient physician services and prescription drugs, not the better known Hospital Insurance trust fund (HI).
“Right now, HI is mostly paying for itself,” Riedl said. “It’s running a shortfall but the shortfalls in a given year can be $20 billion to $40 billion and growing towards $100 billion. The shortfalls in SMI are over $400 billion a year and heading almost towards a trillion dollars a year a decade from now. This year, Social Security and Medicare will run a combined shortfall of $724 billion if you include the interest costs. A decade from now, they’re going to run a shortfall of $2.2 trillion. They’re going to triple. So it’s not that deficits are rising because nature forces them to rise. It’s because of these shortfalls that don’t get a lot of notice by themselves.”
With Social Security, Riedl lamented the lack of political will to confront a problem that was seen coming decades ago. “We’ve known, even in the 1990s,” she said, ”that insolvency was coming in the early 2030s. The reason we wanted to fix it 30 years ago was so that we had a longer runway to gradually phase in the reforms and allow the boomers to adjust decades before they retire. Unfortunately, those reforms were demagogued and now we’re coming up at the last minute, where we can no longer gradually phase in the reforms.”
The end result, she warned, could mean “eventually, at least for a while, bailing out Social Security with general revenues, and delinking the entire idea of Social Security as being self-financing.”
Riedl is not optimistic that the political dynamics in Washington will change in time to phase-in changes. She said, “there are still bipartisan dinners between Republicans and Democrats where they get together in a private room and discuss ways to fix Social Security. The depressing thing, having attended a couple of these dinners, is that they’re totally secret, and everybody has to swear not to admit that they were there, or tell on anyone else for being there, because if their voters find out that they’re trying to solve a major problem in a bipartisan fashion they’ll be punished. So I don’t know if it’s good news that lawmakers are meeting in a bipartisan fashion or bad news that they don’t want anyone to know that they’re trying to solve a problem together.”
Commenting on this summer being the 60th anniversary for Medicare and the 90th anniversary for Social Security, Riedl quipped, “It’s a happy birthday in that I think most Americans would consider these long standing programs that have endured over decades and helped a lot of seniors. But while the patient has lived a long time, it has a pretty bad prognosis right now, and it really needs to get to the doctor, and have some major work in order to keep living for another 60 to 90 years.”
Hear more on Facing the Future. Concord Coalition Senior Advisor Bob Bixby hosts the program each week on WKXL in Concord N.H., and it is also available via podcast. Join us as The Concord Coalition team discusses issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.
