There is a whale in the room this election year that everyone in political life seems to be trying to ignore (I would have used an elephant, but I want to avoid the political overtones). What everyone in both political parties is trying so studiously to ignore is the absolutely overwhelming and crushing future debt that social security and Medicare are set to build up in our nation. Fundamentally, both of these programs were designed in the days when there were very few retired people whose benefits were being carried by a great many workers. Now as our population ages and people live longer in retirement, that ratio is falling drastically and both programs are headed rapidly towards insolvency.
Jagadeesh Gokhale and Kent Smetters, two economists working at the Federal Reserve at the time, wrote a series of papers starting in 2003 outlining the problem. For those who want the details see, for example, Fiscal and Generational Imbalances: New Budget Measures For New Budget Priorities (http://irm.wharton.upenn.edu/WP-Fiscal-Smetters.pdf). All told, the two programs, as presently constituted, were estimated in 2003 to be short about $44 trillion dollars over the next 75 years. $44 trillion is about 10 times the current national debt. In 2003, in order to achieve current solvency, the government would have had to raise payroll taxes by 68.5%, beginning immediately. Alternatively the government could have cut Social Security and non-Medicare outlays by 54.8% immediately and forever. By now (2008) the fiscal imbalance has reached $54 trillion. To reach solvency at this point, taxes would have to increase by 73.7%.
Social Security does in fact have a trust fund which currently holds about $1.6 trillion in surplus, but there is just one little catch. As these excess funds were accumulating, Congress kept draining them out to pay for pet programs, so all the trust fund really holds is $1.6 trillion in Treasury notes, or IOUs, which the government will have to find and put back into the trust fund someday.
What is interesting is that the Republicans, after an abortive little effort to create private retirement accounts at the beginning of Present Bush’s first term, dropped the issue. The Democrats went even further, officially denying there was a problem and accusing Bush of creating a scare. This was pretty cheeky, since in the
Now what is really annoying is that a few very minor changes in the system, made now, could avert the whole problem. Such things as a small increase in the payroll tax, lifting the payroll tax cap (SS currently collects payroll tax only on the first $102,000 earned each year), and changing the Social Security formula for annual cost-of-living increases to track price inflation instead of wage inflation would help to make the system solvent over the long term. None of these measures alone solves the problem, but in combination, they go a long way toward solving the shortfall. Unfortunately, neither political party is willing to take on the hard choices, so we are doing nothing. Ten years from now, it will take much more drastic and unpopular measures to get the system solvent again.
Well, I guess politicians are just following their motto – “never solve today what you can leave as an unsolvable problem for your opponents tomorrow”.
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