The United States solved the Social Security crisis in 1983. A bipartisan commission chaired by Alan Greenspan made proposals to raise taxes, reduce future benefits and disguise these actions. A bipartisan Congress balked, but the Democratic Speaker of the House Tip O'Neill and Republican President Ronald Reagan worked out the differences. They raised taxes less, reduced future benefits less and disguised these actions more. But they succeeded in defusing the problem for a generation.
Checks might have been reduced in 1983 if O'Neill and Reagan had not made their deal, but now the Social Security tax more than covers all benefits for this year, next year and all years projected out to 2017. The accumulated excess of tax receipts over benefits, plus interest, would provide an adequate supplement to taxes out to 2041.
But Social Security is in a continuing long-term crisis: Taxes aren't growing as fast as benefits, which are propelled by increases in the aged population and by cost-of-living increases that outstrip inflation.
…To redeem the trust funds' bonds and pay benefits, the Treasury will have to borrow from the public, more and more every year. This replacement borrowing will have real economic consequences, although no one can know when or if the camel's back will break.
The camel of state might not break under the straws of Social Security alone. Even though the number of beneficiaries will about double in the next 35 years, taxes could be raised to cover full benefits including their cost-of-living increases. All it would take is a 25% increase in the tax on workers and employers.
Medicare presents the poor beast with many more bales to carry. Unlike Social Security, where the only problem is demographics, Medicare pays for health care for the elderly and disabled, and health care costs have been rising at a far faster rate than the population.
Beneficiaries pay some of the cost of Medicare hospitalization insurance, physicians' services coverage and prescription-drug coverage, but the federal government pays most of it, and most of what it pays comes from general revenue and borrowing, not from the Medicare payroll tax.
While the cost of Social Security is expected to rise from 4.2% of gross domestic product in 2006 to 6.2% in 2030 and 6.3% by 2081, Medicare's hospital-insurance cost is estimated to rise from the current level of 1.4% of GDP to 5% in 2081. Physicians' services outlays were 1.3% of GDP in 2006 and are projected to grow to about 4% by 2081 (but could easily be 5%; the 4% figure reflects unrealistic reductions in physician payments required under current law). Prescription-drug outlays are estimated to rise from 0.4% of GDP in 2006 to about 2.4% by 2081.
Add it up and we see Medicare costs rising from 3.1% of GDP ($408 billion) to 6.6% of GDP in 2030 and 11.3% of GDP in 2081. Taken together, we see two programs consuming 7.3% of GDP today, 12.8% in 2030 and 17.6% in 2081.
To put that into perspective, the Iraq War and all other military spending are consuming 4.2% of our current $13 trillion GDP. Or try this: All federal revenues today are about 17.5% of GDP, and they have never exceeded 21% of GDP since World War II. If we are going to cover Social Security and Medicare with taxes, they will be an unprecedented burden on the economy.
If percentages of GDP are too abstract to understand, U.S. Comptroller General David Walker offers figures in cold, hard cash: The present value of the Social Security shortfall is about $5 trillion -- roughly equal to today's national debt held by the public and foreigners. The present value of the Medicare shortfall is about $30 trillion.
These numbers could turn out to be too small. Congress might expand either program, as it did recently by adding the Medicare prescription-drug benefit without funding the $8 trillion additional shortfall. Or a medical breakthrough might let everyone live longer and collect more benefits.
The problem is already three times the nation's annual economic output and 15 times annual federal revenues. How much worse does it have to get before we start fixing it? <<
News 
Market Data 
Discover 
AI
