The fact that
Social Security, Medicare, and Medicaid are on an unsustainable
course is one of Washington's best un-kept secrets, and it was
reconfirmed by the latest annual reports from the Social Security
and Medicare Trustees.
Both programs have
promised benefits to future retirees without the financial means to
pay for them. The level of borrowing or taxing that would be
required to pay for these promises will devastate the economy over
the long term, and the young and future generations will inherit
the burdens of paying for these programs. Such profligacy is poor
stewardship at its worst. Reforming entitlements is not simply a
financial issue; it is also a moral issue, which is why Congress
must take action urgently.
Need for Reform
Both the Social
Security and Medicare trust funds have severely deteriorated since
last year. Table 1 highlights some of the major year-to-year
changes, but the most significant issue for each program is that
the deficits in the Medicare trust fund have risen significantly
and the year in which Social Security's expenditures will exceed
income has moved up one year, to 2017.
In an era when the
U.S. is running a budget deficit of $1.8 trillion with
trillion-dollar deficits likely to continue in the future,
additional deficits in the first- and third-largest government
programs (Social Security and Medicare, respectively) pose a
serious threat to the economy, particularly in the long term.
Over the next 75
years, the present value of the total shortfall in Social Security
and Medicare exceeds $45 trillion. Absent reform, that shortfall
would have to be filled by borrowing or tax increases. Borrowing of
this magnitude would put unsustainable pressure on interest rates
and consume resources otherwise available for private investment.
federal income tax rates that would be required to close the gap
would cause marginal rates to more than double. And it
is young Americans, not the retirees collecting the benefits, who
will be forced to pay for these programs through interest on the
debt or higher taxes.
Every year action
is delayed, the price for resolving this problem increases by $1-2
trillion. There are two main drivers behind this
increase. First, both programs suffer from demographic pressures:
The benefits promised to 77 million baby boomers, some of whom are
already eligible for early retirement under Social Security, must
be paid for by a comparatively smaller working population. Second,
rising health care costs will cause Medicare costs to explode once
boomers become eligible at age 65.
Hope for Reform
significant percentage of the public already recognizes that these
programs must be reformed. Recent polling by Hart Research
Associates revealed that 66 percent of Americans consider the
growing budget deficit and national debt to be a very serious
threat to the country, and 45 percent of Americans believe that
addressing budget problems requires "major structural changes to
entitlement programs" compared to other options.
Some Members of
Congress understand the problem as well. Representatives Frank Wolf
(R-VA) and Jim Cooper (D-TN) and Senators George Voinovich (R-OH)
and Joseph Lieberman (ID-CT) have introduced companion pieces of
legislation, the Securing America's Future Economy (SAFE) Act,
calling for a congressional commission to examine tax and
Hoyer (D-MD) also made aggressive calls for Social Security and
other health reforms in remarks to the Bipartisan Policy Center, and
Congressman Paul Ryan (R-WI) introduced entitlement reform legislation, the Roadmap for America's Future, in the 110th
Congress that would have eliminated long-term deficits while
keeping taxes low.
too, appears to be aware that long-term spending has to be
addressed. During a recent town hall meeting in New Mexico, he
admitted "we are mortgaging our children's future with more and
more debt" and that excessive debt "will have a dampening effect on
our economy." Unfortunately, his budget proposal, which
includes massively expensive new health care and cap-and-trade
programs but ignores entitlement reform, did not match his
It is impossible to
control long-term deficits without modernizing Social Security and
Medicare. These two programs will consume nearly one-third of the
budget this year and will double in size over the next 50 years.
To put these
programs on a sustainable course and control long-term deficits,
there are several key steps the President and Congress should
Recommendations for Reform
#1: Create Budgets for Entitlements and Show Long-Term Obligations
in Congress' Annual Budget. Entitlements are classified as
mandatory spending programs, which gives them first call on federal
resources and allows them to grow on auto-pilot without annual
review. Moreover, unlike most other federal programs, Social
Security and Medicare are not subjected to regular reauthorization
or review. This special treatment absolves Congress from having to
trade-off entitlement spending against other priorities as part of
the traditional budget process and, consequently, fails to contain
entitlements should be treated more like discretionary programs.
The programs should be taken off auto-pilot and put on 30-year
budgets, and those budgets should be reviewed and debated by
Congress every five years to ensure targets are met.
full $45 trillion shortfall in entitlement programs should be
reported in Congress' annual budget to hold Congress accountable
for these expenses. Including these figures would ensure that
major policy changes are affordable over the long term.
For instance, when
Medicare Part D was added in 2004, Congress only evaluated the
five-year program cost of $409 billion, but the long-term,
present-value cost of that program was more than $8 trillion at the
time and exceeds $9 trillion today. Ignoring the true costs of
the program is not only negligent; it also does a severe disservice
to future generations who are stuck with the bill.
#2: Make Retirement Programs Fair but Affordable. Because all
workers contribute payroll taxes to fund Social Security and
Medicare, everyone over the age of 65 is eligible to collect
benefits, and many retirees will spend up to one-third of their
lives in retirement.
This means that a
large portion of promised benefits will subsidize upper- and
middle-class retirees while saddling young Americans with
unsustainable levels of debt. Instead, entitlement programs ought
to be targeted toward the neediest retirees. The retirement age
should be increased and indexed to longevity, and benefits ought to
be adjusted for income levels. Premiums for Medicare Part B
(outpatient care) are already income-related, and applying the same
phase-out of subsidies for Part A (hospital insurance) and Part D
(prescription drug coverage) would erase roughly half of the
#3: Strengthen Personal Responsibility. Automatic entitlement
to government-run Social Security and Medicare benefits has
de-emphasized the role of personal responsibility in retirement
savings. Greater effort must be made to encourage more personal
savings for income and health care needs. For instance, automatic
enrollment in individual retirement accounts for individuals
without employer-sponsored retirement plans could increase savings
participation by as much as 95 percent.
The Way Forward
This is not the
first year that the Trustees have issued gloomy forecasts for
Social Security and Medicare, but it is one of the worst in recent
years. Given that the public and Members of Congress are warming up
to the need for entitlement reform, it is important to act while
there is still time, because delay will only add to the trillions
of dollars in debt young Americans already shoulder for these
budget process, modernizing the programs' structures, and
rethinking an individual's role in his own retirement savings are
all important steps Congress should take to improve the financial
status of Social Security, Medicare, and the America future
generations will inherit.
Nicola Moore is Assistant Director of the Thomas A. Roe Institute
for Economic Policy Studies at The Heritage Foundation.
year, the economic crisis exacerbated the weak financial position
of these programs, because payroll tax revenues that fund these
programs have dropped significantly due to unemployment and
declining wages. But even if the economic crisis had never
occurred, these programs would still be in poor financial
Social Security beneficiaries are eligible to
collect benefits early at age 62, but their monthly benefits are
lowered. The retirement age is gradually moving up to 67, and the
new early retirement age will be 65.