Entitlement Trouble

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This year’s annual report (summary here) says that the finances of Social Security have worsened in the past year.  The lifespan of the Social Security trust fund has been shortened by three years such that (without adjustments) Social Security benefits will now run out in 2033.  This worsening is the result of high energy prices and a slow economy, the Trustees said yesterday.

While this isn’t good news, obviously, it is consistent with the ongoing theme that Social Security is not in crisis, but does need some tweaking. On the other hand, per the Trustees, Medicare is in greater trouble, although it hasn’t gotten a lot worse lately.  The Medicare fund for seniors’ health care is scheduled to run dry in 2024, which is unchanged from last year, largely because of a 2 percentage point cut enacted by Congress last year. Moreover, as reported by the Trustees, “Medicare’s actual future costs are highly uncertain and are likely to exceed those shown” by existing data.

As summarized by the Trustees:

Social Security and Medicare are the two largest federal programs, accounting for 36 percent of federal expenditures in fiscal year 2011. Both programs will experience cost growth substantially in excess of GDP growth in the coming decades due to aging of the population and, in the case of Medicare, growth in expenditures per beneficiary exceeding growth in per capita GDP. Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary factors will be population aging caused by increasing longevity and health care cost growth somewhat more rapid than GDP growth.

The best response should be obvious. “Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare,” the Trustees wrote in their report, and added that “If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare.” Sadly, such a response is unlikely amidst the disfunctionality that engulfs Washington.

Predictably, representatives of the primary political factions issued statements blaming each other.

“The biggest threat to Medicare and Social Security is doing nothing, and the refusal of the White House and congressional Democrats to address our fiscal challenges will have devastating consequences for America’s seniors,” said House Speaker John Boehner (R-Ohio).

House Minority Whip Steny Hoyer (D-Md.) said the Obama health care plan will help save money in Medicare, while Republican budget plans threaten both it and Social Security.

“While Republicans would repeal the Affordable Care Act and are doubling-down on a budget that ends the Medicare guarantee, Democrats will continue to stand up for Social Security and Medicare,” Hoyer said.

The proposals on Social Security reform contained in the December 2010 report of the co-chairs (their was no official report, contrary to consensus opinion) of President Obama’s deficit reduction panel (the Bowles-Simpson commission) include closing about half the gap by gradually increasing the amount of wages subject to tax. Accordingly, the Social Security tax would be imposed on the first $190,000 of wages in 2020, versus about $168,000 under current law.  This year, the tax is imposed on the fist $110,100 of income from wages or self-employment.

The rest of the shortfall would be made up with a gradual increase in the “full” or “normal” retirement age” for Social Security, less generous benefits for the relatively highly paid, and reducing the annual cost of living increase for the already retired by about 0.3 percentage points a year, with an upward adjustment after a beneficiary had been on Social Security for 20 years to soften the cumulative effects. The retirement age increases would start with those born after 1960 (that’s where already legislated retirement age increases end). The 1983 Social Security fix raised  the full retirement age for those born from 1943 through 1954 to 66, boosting it another two months per year after that to 67 for those born in 1960 or later.

Those with more money already get back less relative to what they have paid in than low-income workers; the Simpson-Bowles recommendations would increase that disparity.  Combined with a higher retirement age, the National Academy of Social Insurance has calculated that the Simpson-Bowles proposals would lead to 30% lower benefits for a high earner born in 1975 than one born in 1945.

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