May 1, 2006
By David C. John and Robert E. Moffit, Ph.D.
and Medicare have promised $37 trillion more in benefits to senior
and disabled workers than the programs will be able to pay,
according to a new report. The 2006 annual report of the trustees
of the Social Security and Medicare trust funds concludes that both
programs will require progressively larger transfers from general
revenues to maintain the projected levels of spending.
Social Security will require growing amounts of federal income tax
revenue. Today, 6.9 percent of federal income taxes go towards the
two programs. Dr. Thomas Saving of Texas A & M University, a
public trustee of the Medicare and Social Security trust funds,
estimates that, in 2020, 26.6 percent of all federal income taxes
will go to paying for Medicare and Social Security. By 2030, that
number will increase to 49.7 percent.
Of the two
programs, Medicare presents the greatest challenge to Congress and
taxpayers. The Hospital Insurance Trust fund is projected to be
exhausted by 2018, a change from the previous date of 2020, and the
cost of the Supplemental Medical Insurance program (SMI) is
increasing faster than Medicare trustees had projected.
According to the trustees, Medicare's long-term debt, based
on a 75-year actuarial projection, is now estimated to be $32.4
trillion. Of that amount $8 trillion is directly attributable to
the Medicare prescription drug entitlement. The trustees did revise
the size of the Medicare portion of the debt, which was estimated
at $8.7 trillion in 2005, because the drug costs have risen more
slowly than projected, as have the rates of enrollment. What is
unknown is the extent to which employers, who now get federal
subsidies for maintaining approved drug coverage for retirees, will
continue to maintain that coverage or drop it with the passage of
time. Accordingly, the cost of Medicare's drug entitlement remains
a huge uncertainty.
Current and future
taxpayers will be faced with enormous burdens in trying to sustain
the Medicare program as it is today. According to Dr. Saving,
without any change in the program, Medicare will consume a larger
share of federal income taxes, rising to 23.1 percent of all
federal income taxes by 2020 and 37.5 percent of all federal income
taxes by 2030.
responsible policy option for Congress and the Administration is to
embark quickly on serious reform of the Medicare program and
changing it from an open-ended entitlement to a
defined-contribution program, adjusting contributions for age,
health costs and income.
Security's Growing Deficits
In present value
terms, Social Security owes $6.5
trillion dollars more in benefits than it will receive in taxes.
That number includes $1.9 trillion, in net present value terms, to
repay the bonds in Social Security's trust fund and $4.6 trillion
to pay benefits after the trust fund is exhausted in 2040. This is
an $800 billion increase, more than12 percent, over last year's
$5.7 trillion number.
Net present value measures the amount of money that would have to
be invested today in order to have enough money on hand to pay its
future obligations. In other words, Congress would have to invest
$6.5 trillion today in order to have enough money to pay all of
Social Security's promised benefits between 2017 and 2080. These
funds exclude what Social Security receives during those years from
Social Security will continue to collect more
in taxes each year than it will spend on benefits until 2017, the
same year as in the 2005 report. The trust fund will run out of
money in 2040, a year earlier than last year's report because low
interest rates on government bonds will result in the trust fund
earning less than previously expected. The projections also reflect
a slight increase in the projected future birth rate and a slight
increase in projected productivity increases. Neither change
significantly affected the program's projected future
What most reports will miss is that Congress
will have to start to deal with reduced surplus Social Security tax
collections much faster than it or the public expect. Starting in
2009, the roughly $100 billion annual Social Security surpluses
that Congress has been borrowing and spending on other programs
will begin to shrink. From that point on, Congress will have to
find other sources to replace the money that it annually borrows
from Social Security or reduce spending. The surpluses will end
completely in 2017, the year when Social Security begins to spend
more than it takes.
In a little more than 15 years, today's $100
billion annual Social Security surplus will turn into a $100
billion annual deficit-a $200 billion change. From 2017 on, Social
Security will require large and growing amounts of general revenue
money in order to pay all of its promised benefits. Even though
this money will technically come from cashing in the special issue
bonds in the trust fund, the money to repay them will come from
other tax collections or borrowing. Moreover, the billions that go
to Social Security each year will make it harder to find money for
other government programs such as Medicare.
The 2006 Medicare and Social Security trustees
report shows that the two entitlement programs cannot remain in
their current forms. It is irresponsible to saddle our children and
grandchildren with the $37 trillion in additional taxes that will
be needed to pay full benefits into the future. And, the cost just
continues to grow every year. Unless Congress begins to work now to
fix this country's most important programs for senior citizens, our
children will face the choice of paying for programs for their
parents or paying for education for their children. Delay will only
make that dilemma worse.
John is a Senior Research Fellow in Thomas A. Roe
Institute for Economic Policy Studies, and Robert Moffit,
Ph.D., is Director of the Center for Health Policy
Studies, at The Heritage
Social Security and Medicare have promised $37 trillion more inbenefits to senior and disabled workers than the programs will beable to pay.
David C. John
Senior Research Fellow in Retirement Security and Financial Institutions
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Robert E. Moffit, Ph.D.
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