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Social Security and Medicare cash flows [ClearOnMoney]
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Social Security and Medicare cash flows

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Commentary

Social Security and Medicare cash flows

24 Apr 2012 by Jim Fickett.

Yesterday the trustees of the Social Security and Medicare trust funds released their annual report. This report, in sharp contrast to most of the news and discussion it spawns, is remarkably clear. Here, for example, is the state of Social Security funds in a nutshell:

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three- quarters of scheduled benefits through 2085.

From the point of the Social Security program,

  • A transition was made in 2010, from living off of income to living off of income plus interest on savings
  • Through 2022, withdrawals from savings will be less than interest earned, so that the savings balance will continue to grow
  • After 2022, withdrawals from savings will begin to eat into principal, so that savings will be exhausted by 2036

Note, though, that from the point of view of the general US budget things look a little different. The Social Security savings, that is, the trust fund, is not like a bank account, where the principal is loaned out and will be repaid. It has been spent as it came in and is gone. So any withdrawal of savings by the Social Security program requires the US government to either raise taxes or borrow more. During the period 2010-2022, Social Security is, from its own perspective, in pretty good shape – living off of income (the OASDI wage tax) and interest on savings. But from the perspective of the US government, 2010 was a watershed year, when Social Security went from providing extra cash that did not have to come from tax or borrowing, to a negative, where extra borrowing had to cover Social Security interest payments that were not now just an accounting entry, but actual money needing to be spent.

Although an important watershed has occurred, this is not a major factor in the the US budget deficit. The deficit in 2011 was $1,295bn, while Social Security took out $46bn more than it put in.

How difficult would it be to end all the headlines about Social Security running out of money, and just fix it? As a matter of fact, not that hard.

the annual cost of Social Security benefits .. equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report.

So some mix of tax increases and benefit cuts working out to 2% of taxable payroll would make the whole problem go away. It is hard to believe that our political system is so dysfunctional this is apparently almost impossible to accomplish.

Medicare is, of course, a bigger problem. Payroll taxes and premiums only cover about half the cost, and on the order of $200bn comes from the general budget. This is projected to approximately double (as a fraction of GDP) in the next few decades. In the case of Medicare it is not a case of tweaking a healthy system; rather, Medicare is one part of a much bigger problem, that health care in the US provides mediocre outcomes for exorbitant amounts of money.