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The annual Social Security and Medicare Trustees reports
released on April 23 discussed changes in the programs that have
occurred over the previous year and changes in their overall
financial condition as measured in a number of ways. Once again,
both reports share a disturbing commonality: The financial
condition of both programs is terrible and got significantly worse
with another year of legislative inactivity.
The key particulars in this case are that Social Security is
facing a financial abyss that got $200 billion deeper over the past
year, while Medicare's abyss deepened by $3.8 trillion.[i]
Unfortunately, we don't have comparable statistics for Medicaid,
but Medicaid's future is just as troubled. In their current forms,
these programs are simply and unquestionably unsustainable.
To put these figures in some perspective, the federal
government's cash flow deficit for 2008 is forecast to be below
$250 billion, or about 1/16th of the worsening in the finances of
Social Security and Medicare combined. Put another way, the $4
trillion increase in the unfunded obligations in these programs is
about a third the size of our total economy.
The Trustees are not alone in sounding the warning. David
Walker, Comptroller of the United States and head of the Government
Accountability Office, has appropriately made this issue a top
priority. Congressional Budget Office directors talk about it
frequently. The Administration has featured the problem for years
in the annual budget release and elsewhere. And members of the
think tank community from right to left have formed the Fiscal
Wake-Up Tour to educate Americans across the country about the
problem and discuss solutions.
Why Does This Matter?
Tax receipts flowing into Social Security in 2007 are projected
to exceed expenditures by $88 billion, and Medicare draws on
general revenues for much of its funding. With the overall budget
deficit now below 2 percent of gross domestic product (GDP), it's
fair to ask why Congress and the American people should take much
notice of the 2007 Trustees reports. There are many good reasons to
The alternative is to impose a vastly greater tax burden than
would be tolerated today to pay future benefits. One can debate
whether taxes "should be part of the solution," and part of that
debate should be an honest recognition that higher taxes would mean
slower future wage and job growth. It is unclear why future workers
should pay higher taxes, have fewer job opportunities, and receive
lower pre-tax wages because today's workers and retirees promised
themselves higher benefits than they were willing to pay for, but
that will sort itself out in time. In any event, given the
magnitude of the problem, it is as unreasonable to suggest that
Congress can tax its way out of this problem as it is to deny the
problem in the first place.
What Is the State of Play?
The Administration, from the President on down, has tried
repeatedly to rally sufficient political forces to achieve reforms,
with one noteworthy success. Congress passed and the President
signed the Deficit Reduction Act in 2005, shaving almost $51
billion over 10 years off the growth in Medicare and Medicaid
spending. The changes were modest, but they were also the first of
their kind since 1997.
Following the 2004 elections, the President gave scores of
speeches from coast to coast about how Social Security could be
made sound for future generations. He argued for personal accounts,
but he also showed that a handful of minor, phased-in changes to
the program could return it to solvency. Regrettably, Congress did
not take up the challenge. Some in Congress argued there was no
problem, or at least no urgency. Others countered that the real
problem was Medicare, not Social Security, and that the
Administration should therefore focus its efforts on Medicare.
In response, the President's budget released in February of 2007
offered meaningful proposals to slow the growth in Medicare
spending. The President's proposals would shave $252 billion off
the growth in Medicare spending over the next 10 years according to
the Trustees. Over the next 75 years, a common point of reference
for these programs, the President's proposals would fill a quarter
of the Medicare abyss.
These proposals are especially apt because the Medicare Trustees
report, for the second year running, indicates that the general
revenue share of Medicare spending will exceed 45 percent during a
seven-fiscal-year period. The various parts of Medicare are funded
by a combination of payroll tax receipts, beneficiary premiums, and
a draw from general revenues. The 2004 Medicare reform bill
included a so-called trigger. Under this "trigger," as the 45
percent threshold has now been exceeded this year and last, the law
directs the President to submit a proposal for action to Congress.
There is nothing particularly magical about the 45 percent figure.
It was deemed an appropriate early warning threshold. We have now
crossed that threshold, the warning has been sounded, and Congress
should act to strengthen Medicare's finances.
What Should Be Done?
The textbook answer to what should be done is that the
responsible committee chairpersons and leadership should begin
crafting a bill to restore Social Security and Medicare to solvency
immediately. That is why academic textbooks often have limited
value in public policy: The chosen actors are right, but the goal
is misidentified. Recognizing the highly charged political
environment, the season of the President's term, the unfamiliarity
of many Members with the policy alternatives, and simply the
magnitude of the problem, this Congress and the Administration
should act, but they should also focus their attention on the realm
of the possible. This means taking a few easy steps with Social
Security and/or Medicare to bring them under control gradually by
focusing benefits more on the basis of income.
Social Security. Though the recent debate on Social
Security reform was largely associated with the push for personal
accounts, there are many good ideas for improving program solvency
that could be achieved relatively easily and painlessly. Probably
the foremost of these is progressive indexing. Progressive indexing
simply means that the Social Security benefits of low- and
middle-income retirees would be indexed to nominal wage growth, as
under current law, while the benefits of upper-income retirees
would be indexed to inflation. Since nominal wage growth is
typically significantly faster than inflation, the net effect is an
increasingly progressive benefit formula. At the same time, total
growth in benefit outlays is slower because the benefits of
upper-income retirees grow less rapidly than under current law as a
result of being indexed to inflation rather than the faster nominal
wage growth rate.
Medicare. Now that the Medicare trigger has been tripped,
Congress should also act to reduce the Medicare shortfall, starting
with the proposals the Administration advanced in this year's
budget, to which Congress can and should add its own ideas. Some of
these proposals include the usual shifts in provider payments that
are needed to avoid having Medicare overpay for services. Medicare,
after all, operates as an insurance company, and payment rates for
services need to adjust from time to time according to market
In addition, the Administration proposed to means-test, or
"income relate," the Medicare Part B subsidy to parallel the
premium subsidy structure in Part D. Under current law, Medicare
Part B beneficiaries pay a premium for their coverage equal to 25
percent of the program's cost, with taxpayers picking up the tab
for the other 75 percent. Under the Administration proposal, all
Medicare beneficiaries would continue to have their Part B premiums
subsidized, but the subsidy rate would decline to 65 percent for
families with incomes between $160,000 and $200,000 and would fall
in increments to 20 percent for families with incomes above
This proposal increases the progressivity of Part B subsidies
while reducing total Medicare costs. It should be a win-win for
legislators of all political stripes. The provider payment reforms
and the reforms in the Part B subsidy together represent major
steps toward rectifying Medicare's terrible fiscal condition.
The latest Social Security and Medicare Trustees reports confirm
again that these two large and vital programs for seniors are
unsustainable in their current form. While one can always quibble
with the underlying assumptions, the basic conclusions stand, and
the Trustees have met their responsibility to report the facts.
Many solid, incremental reforms have been identified for both
programs that Congress could debate and enact. It is time now for
the true trustees of these programs, the Congress and the
President, to act on these reforms.
Ph.D., is Norman B. Ture Senior Fellow in the Economics
of Fiscal Policy in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.
These figures refer to the change from 2006 to 2007 in the unfunded
obligations in Social Security and Medicare, respectively, on an
The financial condition of Medicare and Social Security is terribleand got significantly worse with another year of legislativeinactivity.
J.D. Foster, Ph.D.
Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
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