Interesting read:
Revised April 2, 2004
MISLEADING CLAIMS ABOUT NEW SOCIAL SECURITY AND MEDICARE PROJECTIONS
By Robert Greenstein and Peter Orszag [1]
Individuals close to the Social Security and Medicare trustees’ reports that will be released March 23 have begun leaking and spinning selected figures said to be included in the reports. The leaking is evidently designed to create impressions that the programs’ financial condition is far worse than has previously been understood. This brief piece, drawn from a new Center analysis,[2] seeks to set the record straight.
Misleading figures about Social Security and Medicare shortfalls: A New York Times article on Friday reported that the Social Security and Medicare trustees’ report to be released March 23 were expected to show shortfalls in these programs close to $50 trillion, up from $18 trillion as estimated by the Administration last year. Last year’s trustee’s’ report contained no $18 trillion figure. Both of these figures are misleading, as is the comparison between them. [March 23 update: neither of these figures or anything like them is in the new trustees’ reports.]
If Medicare Part B is an “unfunded liability,” so is the Pentagon and most of government: The $18 trillion figure is a distorted figure that the Bush White House has been pushing for some time. It includes as an “unfunded liability” the projected costs over the next 75 years in the Medicare physicians’ insurance program (Medicare Part B). This program, however, is funded by general revenues, not dedicated revenues. Unlike in Social Security and Medicare hospital insurance, there is no specific shortfall between promised benefits and dedicated resources set aside to finance them. Accordingly, estimates of the costs of Medicare physicians’ insurance have never been counted as part of the shortfall in previous trustees’ reports. [March 23 update: these costs are not counted as part of the shortfall in the new trustees’ report.]
Computing a separate “unfunded liability” for programs financed by general revenue, such as Medicare Part B and the drug benefit, consequently makes little sense. It is fundamentally misleading. If this approach is to be applied to Medicare Part B and the drug benefit, it could just as well be applied to the defense budget or any other parts of the federal budget financed by general revenue. Such an approach would show a $30 trillion shortfall in defense over an infinite horizon.
“Infinite horizon” estimates, especially for Medicare, are highly speculative: The $50 trillion shortfall figure for Social Security and Medicare combined is even more dubious. It supposedly represents a projection of the shortfall over an “infinite horizon” (i.e., into infinity). But this figure is badly flawed for two reasons. First, it improperly includes the parts of Medicare that are funded by general revenue rather than dedicated revenue. Second, while there may be some value in projecting Social Security liabilities over an infinite horizon, projections of Medicare costs over an infinite horizon are so wildly speculative as to have little value. Projecting the state of health care and medical breakthroughs in the 24th century lies more in the realm of science fiction than hard-headed policy analysis.
Even projecting Social Security liabilities over an infinite horizon is fraught with dangers. In a letter to the Social Security trustees in December 2003, the American Academy of Actuaries, the nation’s leading professional organization of actuaries, warned that such projections “provide little if any useful information about the program’s long-range finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic, and actuarial aspects of the program’s finances into believing that the program is in far worse financial condition than is actually indicated”.
Unfunded liabilities in Social Security likely to show little change: A claim that unfunded liabilities have more than doubled since last year’s report would be incorrect — such a claim rests on a comparison of a flawed $18 trillion projection for a 75-year period to a flawed $50 trillion projection over an infinite period. Over the standard 75-year period that continues to represent the longest period over which policy decisions should be based, the new report is expected to show little change from last year’s report in the size of the unfunded liabilities in Social Security.
Social Security and Medicare shortfalls — like budget deficits — must be viewed in relation to the size of the economy: The Administration constantly emphasizes the importance of viewing budget deficits in the context of the size of the economy. The same holds true of Social Security and Medicare deficits. Data in last year’s trustees’ report indicate that the Gross Domestic Product (the basic measure of the size of the economy) will total $500 trillion over the next 75 years and close to $1 quadrillion over an infinite horizon. (These figures, like the figures in the trustees’ report on Social Security and Medicare unfunded liabilities, are expressed in “present value.”) [March 23 update: the new trustees’ report projects that GDP will total more than $500 trillion over the next 75 years and about $900 trillion over an infinite horizon.]
Cost of making Bush tax cuts permanent is three times the Social Security shortfall: One other comparison bears noting. If the 2001 and 2003 tax cuts are made permanent as the Administration has proposed, their cost over 75 years will be about $11 trillion —three times the Social Security shortfall and nearly the same size as the Social Security and Medicare Hospital Insurance shortfalls combined. Over an infinite horizon, the cost of the tax cuts is more than 1½ times the Social Security shortfall.
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