Guesses Won’t Save Social Security
Social Security and Medicare continue to slide toward insolvency, but at a somewhat slower pace than earlier feared. That’s the recent forecast of the trustees of the two huge entitlement programs. Like all such forecasts, these involve more than a little guesswork.
By law the trustees are required to peer into the future and make conservative assumptions about economic growth, employment, incomes, health care costs and longevity. This year the trustees--three members of President Bush’s Cabinet and two outsiders representing the public--predicted that growth over the next 10 years will be well below what the Congressional Budget Office or White House analysts foresee. That could mean tighter employment and reduced payroll taxes. If the trustees are right, federal surpluses will be too small to argue over.
Bush cited the trustees’ report to support his effort to partially privatize Social Security, an approach the Social Security commission he plans to appoint soon will probably endorse. Democrats saw the report as an argument against Bush’s proposed $1.6-trillion tax cut, which is based on projected federal surpluses of $5.6 trillion over the next decade. About $2.5 trillion of the surplus would come from the Social Security retirement fund. Democrats worry that Bush’s tax plan is so big it could jeopardize the retirement fund.
By estimating that the Social Security and Medicare trust funds won’t face insolvency until 2038 and 2029, respectively, the trustees may have handed Congress an excuse to delay shoring up either program. Politicians usually are in no rush to deal with a problem seen as decades away, especially when the remedies are bound to cause pain.
In fact the crunch period is a lot closer. By 2016, the projections say, both systems will have to start tapping their trust funds as payroll taxes fall below program costs. The trust funds are essentially loans to the Treasury, to be repaid out of general revenues--or, if the revenue isn’t there, with borrowed money.
Everyone in Washington knows there are only three certain ways to extend the solvency of the entitlement programs, all of them politically unappealing: increase payroll taxes, cut benefits or raise the eligibility age for retirement. Bush’s notion to let younger workers shift part of their payroll taxes to private market investments is hardly a road to salvation, and not only because of market uncertainties. The billions his plan would divert from the trust fund would have to be replaced, or the system would be in trouble earlier.
The moderately improved outlook for the trust funds is due to recent high employment, which has boosted payroll tax revenues, and to better controls over Medicare fraud and abuse. But when the trustees look ahead to 2030 they see Medicare costs swelling to 4.5% of the gross domestic product, nearly double the percentage today. And that doesn’t take into account any new prescription drug benefit that might be enacted for some or all Medicare recipients.
Because the trustees must be cautious, Social Security may not actually run into trouble until after the time projected. That’s not the case with Medicare; as life expectancy increases, the demand for health care grows. The one certain thing is that before long there will be a tidal wave of 76 million baby boomers demanding their share of Social Security and Medicare. The great political decision is how that fair share will be paid for.
