The trustees for Social Security and Medicare have been reporting the imminent bankruptcy of Medicare, and to a lesser extent Social Security, for years with the dates of financial doom coming closer and closer. This year everything magically improved. The professional “senior groups” rushed to USA Today to declare: “There is no entitlement crisis.”
How did this miracle happen? It turns out that President Barack Obama and Senate Leader Harry Reid were the magicians behind the curtain. They came up with the idea of surreptitiously changing the law to require trustee staff to use new actuarial assumptions and, poof, the red ink dried up. The Republicans pretty much went along with the gag because in fact dealing seriously with the elderly entitlement programs is highly unpopular and, after all, they are politicians and want to get re-elected too.
The Washington Post headline could only concede things were “a bit” darker. Even The Post had to admit that even with the legal jujitsu Social Security would empty its trust fund by 2030 and Medicare would go into deeper red even earlier, in 2024. In general, the government bureaucrats had followed the Obama-Reid instructions.
One real hero refused to follow the inside-the-Beltway script. Richard Foster, the chief Medicare actuary, reported the data as required by law but added this gem in a well-buried appendix for those few who could delve down that deeply into the truth.
The financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in the physician payment rates) or in the long range (because of the strong likelihood that the statuary reductions in price updates for most categories of Medicare provider services will not be viable).
He then directed readers to dig down further to the following chart, which corrects for the two problems. The top line shows the Medicare obligations in both the short and long terms to be much higher than the data reported to the media in the main body of the report. Over the long term, Medicare consumes not an unprecedentedly high 6.7 percent of the total wealth created by the nation — that is, the gross domestic product — but an incredible 10.4 percent of everything produced to sustain the American population in that not-so-distant year. In other words, if one delves far enough into the trustee report, one will find that the entitlement crisis is not only back, but much worse and will keep getting worse still.
Figure V.C1. — Medicare Expenditures as a Percentage of Gross Domestic Product under Current Law and Illustrative Alternative Projections
Unfortunately, there was no such bureaucratic hero at Social Security. But the facts as released to the media for that program were almost as misleading. First, the stories all focused on trust fund balances, but as almost everyone now knows, there is no real trust fund. What counts is cash coming in and checks going out. As the following also well-hidden chart shows, Social Security income has exceeded program costs right up to very recent times. But the government spent the surplus on other programs and wrote itself an IOU to the trust fund for the difference. For the past two years and forever into the future, costs exceed payroll tax income and to redeem the IOUs the government has to obtain the cash from somewhere else, either by taxing or borrowing. The free lunch is over.
The top three lines on the following chart (most of the Social Security program is the OASI retirement program, so the lower three lines can be ignored here although Disability Insurance is in even deeper trouble) differ basically because different economic assumptions are made to forecast future economic growth. The higher the growth, the more income is available to pay retirement obligations. The Social Security game is played by making unrealistically high economic growth assumptions so that it appears to remain solvent longer. Make high enough growth estimates and all magically is fine.
In fact, the estimated growth has been historically lower than the “middle estimate” normally used to report to the public. Growth since the Great Recession has been even lower. If one accepts the rosiest scenario in the trustee report, as shown in the figure below, Social Security eats up 10 percent of the total taxable payroll of the nation. The middle estimate is 15 percent of payroll. The highest curve represents the most realistic lower growth estimate and this more reasonable assumption shows Social Security will consume more than twice as much of America’s total income, at well over 20 percent, and will increase even more over time.
Figure IV.B1. — Long-Range OASI and DI Annual Income Rates and Cost Rates (As a Percentage of Taxable Payroll)
So relax. We are from the government and are here to help: to help citizens continue living in a dream world about the major entitlement programs of Medicare and Social Security, until they collapse — which could be as soon as during the next presidential term — and then devour the whole economy.
Donald Devine, a senior scholar at The Fund for American Studies and the editor of Conservative Battleline Online, was the director of the U.S. Office of Personnel Management from 1981-1985 under Ronald Reagan.