The Long-Range Social Security/Medicare Deficit: $72 Trillion And Counting

By John C. Goodman for Forbes

The Social Security/Medicare Trustees have issued their latest reports and they are not easy reading for the uninitiated. I suspect most of the Trustees hope you don’t read them at all. They prefer their own spin. Under both Republican and Democratic administrations, these reports are invariably accompanied by a press release that completely ignores what is important and focuses instead on what is unimportant.

What’s unimportant? The trust funds and when they will run dry. Like most social security systems in the world today, ours is a pay-as-you-go system. Nothing has been saved or invested. What we call trust funds consist of nothing more than IOUs the government has written to itself. (More on that below.) Yet, that is what the official press releases emphasize and this focus is reflected in the first graph below.

What’s important? Cash flow. In fact, in a pay-as-you-go system, cash flow is the only thing that matters. As the second graph shows, Social Security and Medicare are paying out more than they are taking in. As the baby boomers retire, the total deficit will grow dramatically. Currently, we are using about one in every seven general revenue dollars to cover these deficits. By 2020, we will need more than one in five. By 2030, we will need about one in three.

That implies that in order to fund Social Security and Medicare benefits at their current levels and at the same time balance the budget, in just five years the federal government will need to stop doing about one out of every five other things it is currently doing. In just 15 years, the government will need to stop doing about one out of three other things it is currently doing. Clearly, elderly entitlements are on a course to crowd out all other federal programs.

Although the trust funds do not hold valuable assets that can be used to pay benefits, they are useful for another reason. As Figure I shows, trust fund accounting keeps tract of the inflow and outflow of funds related to our entitlement programs­ over time.­ Up until sometime in the first decade of the twenty first century, Social Security, Medicare (Part A) and the Disability trust funds were collecting in taxes and premiums more than they paid out in benefits. Today, however, all three programs are paying out more than they are taking in. Figure II shows how this negative cash flow is accumulating.

In conventional media accounts, the trust funds will “run out of money” when the lines on the graph in Figure I cross the x-axis and become negative. This will occur next year for the Disability program. For Medicare Part A, it will occur in 2030. For Social Security retirement, it will occur in 2035. Of course, there is no “money” to run out of. But those are the dates in which Congress and the President must act. If they fail to act, the Treasury will be required to reduce benefit payments to the point where they equal the income (taxes and premiums) into each of the programs. The Disability program, for example, will only be able to pay 80 percent of promised benefits – beginning next year.


running out


negative effect

If we have a debt that is growing through time, the natural question to ask is: What is the value of that debt in current dollars? The Trustees actually answer that question. But the answer is buried deep in the report and camouflaged in various ways that require expert deciphering. The table below reflects calculations by former Trustee Thomas Saving and his colleague Andrew Rettenmaier. As the table shows, promises we have made minus expected premiums and dedicated taxes total $41.3 trillion over the next 75 years



Since 75 years is such a long way off, why do we need anything more than that? Think about the person who is about to retire in the 75th year. A 75-year projection would count all the taxes this individual is expected to pay, but it would ignore all the benefits he expects to receive based on those taxes. So cutting off our projection in the 75th year, or any other year, seriously understates the debt we are amassing. That’s why economists prefer to extend the analysis indefinitely into the future.

After doing that, the Trustees tell us that our total unfunded liability is $72.1 trillion.

Yet even this number is almost certainly too low. It assumes that (Obamacare) cuts in Medicare spending are sustainable. That is, when seniors cannot find doctors who will see them or facilities that will admit them and access to care for Medicare enrollees is even worse than it is for people in Medicaid, Congress will ignore the complaints of the elderly.

If that doesn’t happen (and almost no one in Washington thinks it will happen), then the true unfunded liability is more than $100 trillion – roughly six times the size of our entire economy.

As I promised, back to the trust funds. Pay-as-you-go means every dollar collected in payroll taxes is spent. It is spent the very day, the very hour, the very minute that it comes in the door. Nothing is saved. Nothing is invested. The payroll taxes contributed by today’s workers pay the benefits of today’s retirees. When today’s workers retire, their benefits will have to be paid by future taxpayers.

Like other government trust funds (highway, unemployment insurance, and so forth), the Social Security Trust Fund exists purely for accounting purposes: to keep track of surpluses and deficits, and the inflow and outflow of funds. The accumulated Social Security surplus actually consists of paper certificates (non-negotiable bonds) kept in a filing cabinet in a government office in West Virginia. (Medicare avoids the paperwork by doing the accounting electronically.) These bonds cannot be sold on Wall Street or to foreign investors. They can only be returned to the Treasury. In essence, they are IOUs the government writes to itself.

Every payroll tax check signed by employers is written to the U.S. Treasury. Every Social Security benefit check comes from the U.S. Treasury. The trust funds neither receives money nor disburses it. Moreover, every asset of the trust funds is a liability of the Treasury. Summing over both agencies, the balance is zero. For the Treasury to write a check, it must first tax or borrow

Source: How Much Do We Owe? $72 Trillion And Counting - Forbes

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