Friday, April 18, 2008

Social Security and Medicare; the problems being ignored

Shortly after his election, President George Bush said he would use his "political capital" to take care of social security because in not many years the funds available to social security recipients would dry up; and he was widely ridiculed for recognizing this was an important problem area that needs to be fixed.

Although the government supposedly keeps a "separate account" ("trust fund") for social security payments made by workers, the government actually uses this money to fund the budget. The government then issues "IOUs" to the social security trust fund for money taken out. Unfortunately for the rest of us, these acknowledgements of "loans" to the government general fund of our social security contributions can’t be used to pay us when we are ready to receive social security benefits. The result will be that at sometime in the short term future those of us relying on social security benefits in retirement may have our benefits reduced or workers still paying into social security will have to be taxed a lot more to make up the shortfall, or the retirement age will have to be drastically increased, or all of the above.

In 2007, combined Medicare and Social Security benefits used a total of 7.5% of our Gross Domestic Product (GDP). In dollars and cents this portion of the GDP based on a total estimated GDP in 2007 of more than $13 trillion, means the 7.5% of GDP spent on these two entitlement programs amounted to just under $1 trillion last year. Projections show that these programs will grow to 12.3% of GDP in 2030, and 13.6% in 2040 as more baby boomers retire. Recognizing that all our federal revenues averaged 18% of GDP over the past 40 years, the kind of crisis looming ahead can be better put into perspective. Only a huge tax hike or a cut in future benefits will enable the country to meet its obligations to senior citizens. Even so there will be very little money available for national defense, education, other domestic programs, etc.

It is estimated that payroll tax revenues (social security payments by workers) will fall below annual expenditures in 2017. At that time the government will begin drawing upon the "trust fund," which by then is expected to have grown to approximately $2.7 trillion (in present value). However the "trust funds" will be slowly depleted and will reach a projected zero balance in 2041. From then on tax revenues are would cover only about 78% of expected benefits.

As bad as the future of social security looks, Medicare is in even worse shape because Medicare not only has to deal with the income shortfall of Social security in the future but the problem of rising health care costs (which are rising at a rate greater than inflation). Beginning in 2008, the Medicare Hospital Insurance (MHI) program is expected to pay out more in benefits than it receives in revenues and its "trust fund" will be depleted by 2019. When this money is gone the MHI expenditures will have to be funded from general revenues.

Not only that but health care costs are growing very fast and annual costs are expected to jump from 3.2% of GDP in 2007 to 10.8% of GDP in 2082. It is also anticipated that Medicare expenditures will grow faster than Social Security by the year 2028.

Premiums paid for Medicare Supplementary Medical Insurance program which pays for physician services and prescription drug benefits will also continue to increase substantially faster than the economy and beneficiary incomes.

Although not commonly known, the Medicare legislation providing for Medicare prescription drug benefits requires that a warning be issued if the Trustees predict that more than 45% of Medicare's spending will come from general government revenues within a seven-year window. Actually this is the second consecutive year that the Medicare funding warning has been sounded.

The warning may not mean much now but the law requires the next president to issue a proposal to rein in the costs of Medicare within 15 days after submitting the Fiscal Year 2010 federal budget. Congress must then consider this proposal on an expedited basis. However, there is no requirement that Congress actually pass any legislation to address the situation. President Bush did submit such legislation required by this law (H.R. 5480), but it obviously will not receive any serious consideration in congress this year.

Not only has none of the presidential candidate failed to address this serious problem, but Senators Clinton and Obama plan to add to costs by mandating universal health insurance. They should be asked to comment on how they will deal with the Social Security and Medicare funding issues and explain how they can fix those problems and still implement their universal health insurance schemes.

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