Medicare and Social Security Challenge
March 2, 2004
NEWS ANALYSIS
The New York Times
By EDMUND L. ANDREWS
WASHINGTON, March 1 - When Alan Greenspan urged Congress last week
to cut future benefits in Social Security and Medicare, sending elected officials
to the barricades, he was if anything understating the magnitude of the problems
ahead. Today's budget deficits are measured in the hundreds of billions,
but the looming shortfalls for the two retirement programs are projected to be
in the tens of trillions of dollars.
The Bush administration has estimated that the gap between promises
under current law and the revenues expected will total $18 trillion over the next 75 years.
But an internal study in 2002 by the Treasury Department, looking much further ahead,
concluded that the gap was actually $44 trillion - and would climb each year that
nothing was done.
Indeed, the numbers are so big and extend so far into the future
that they border on the surreal. Analysts in both Congress and the administration
warn that the flood of retiring baby boomers will cause federal spending
on old-age benefits to eventually consume
as much of the nation's economy as the entire federal budget does now.
And while the problems would be acute even if today's federal budget were balanced,
the budget deficits that seem likely for the rest of the decade make matters worse.
That is because the government is borrowing more than $200 billion a year from the
Social Security and Medicare trust funds to finance its operating deficits.
In theory, the two giant trust funds are accumulating huge surpluses that can be
used to pay for benefits when the baby boomers retire and the systems start taking
in less than they are paying out. In practice, those surpluses are being spent,
and the government will probably have to borrow enormous sums to meet
its obligations to retirees.
"It is time to start telling people the truth," said Laurence Kotlikoff,
a professor of economics at Boston University and
a longtime analyst of the issue. "Suggesting that some minor
adjustments to Social Security will solve the problem
is doing a disservice." Mr. Greenspan, the Federal
Reserve chairman, provoked a political tempest when he told
members of the House Budget Committee last
week that Congress needed to trim future Social Security and Medicare benefits
to head off a fiscal calamity in decades to come.
Mr. Greenspan proposed adjustments in how the government increases
benefits to keep up with inflation and suggested pushing back retirement ages
to better reflect increased life expectancy.
Democrats immediately attacked the proposed cuts, saying they would be unnecessary
if President Bush had not been running up large annual budget deficits just before
millions of baby boomers reach retirement age. "Cutting Social Security benefits
is not the way to rein in the irresponsible Bush budget deficit,'' chided Senator Tom Daschle
of South Dakota, the Senate Democratic leader. President Bush and Republican lawmakers
distanced themselves as well, saying that much of the problem could be averted
by setting up private savings accounts.
But as precarious and uncertain as long-range forecasts are, most experts agree
that the combined challenges of Social Security and Medicare are too big to be
addressed without politically painful remedies.The number of retirees is expected
to soar from about 40 million today to more than 76 million by 2030, which means
that fewer dollars will be coming in from payroll taxes and many more dollars
will be going out in retirement and medical benefits.
The oldest baby boomers turn 65 in 2011, and by one estimate a husband and wife
who retire that year are likely to collect $700,000 in benefits before they die.
Trustees of the Medicare and Social Security funds predict that the two programs
will run surpluses of more than $200 billion a year for at least the next decade.
But the Medicare trust fund will start running deficits in 2013 and run out of money by 2026.
Starting in 2018, the Social Security System starts paying out more than it takes in
and will have to dip into its trust fund. By 2044, the trust fund will be exhausted.
Most experts say the problems of Social Security are much smaller and more
predictable than those of Medicare, because retirement formulas are fairly simple
and the cost of benefits depends primarily on demographic trends that are quite predictable.
But Medicare's condition is more ominous, because medical costs
have been rising much faster than the overall rate of inflation and the
demand for health care is expected to soar as the baby boomers retire.
The Bush administration estimated last year that Medicare's obligations
would be more than $10 trillion over the next 75 years. But that was before
President Bush signed the law that will add prescription drug benefits
to Medicare - which the administration now predicts will cost $540 billion
over the next 10 years. The costs would climb rapidly after that, as the number
of elderly people soars. The Congressional Budget Office has predicted that the
new program could cost as much as $2 trillion in its second decade.
Mr. Bush and many administration officials contend that much of Social Security's
problems could be solved by letting people divert some of their payroll contributions
to private investment accounts they might manage for themselves.
But some experts say that the government would have to borrow as much
as $1 trillion over the next several decades to make up for the lost revenues
and pay retirees benefits earned under the old system.
And the Congressional Budget Office, in a report on privatization plans last year,
said none of the proposals would have much effect.
"Using government resources to buy stocks and bonds, without other
spending and tax changes, would not automatically lead to an increase
in the nation's pool of investment resources,'' the budget office concluded.
"There is no such thing as a free lunch.''
Some experts contend that even the administration's chilling projections
about the looming problems of Social Security seriously understate the problem.
In 2002, two senior economists at the Treasury Department were asked
by Paul H. O'Neill, then the Treasury secretary, to come up with a
comprehensive estimate of the federal government's long-term fiscal problems.
The total, calculated Kent Smetters, then a deputy assistant secretary
for economic policy, and Jagadessh Gokhale, an economist on loan to the
Treasury from the Federal Reserve Bank of Cleveland, was an almost unthinkable $44 trillion.
That projection was swiftly disavowed by the administration. Rob Nichols,
a spokesman for the Treasury Department, said the White House never intended
to use the study in its official budget forecast. "They were doing what they called
an independent paper,'' he said.
Mr. Gokhale, now a senior fellow at the Cato Institute, a policy research group
in Washington, recalled matters differently. "At some point, late in the game,
it was decided that it wouldn't be in the budget,'' he said. "In my opinion,
if they had reported these numbers, they would have gotten a lot of credit.''
Professor Kotlikoff of Boston University has devised a "menu of pain'' to lay out
different ways of bridging the gap. The choices range from an immediate increase
in federal income taxes of 69 percent to an immediate cut in Social Security
and Medicare benefits of 45 percent.
And those numbers may be too low, he said, because even the disavowed
Treasury estimate for the shortfall may be too low. Adding in the new
prescription drug program, he said, the imbalance is closer to $51 trillion.
Whether one accepts the administration's forecast or that of the disavowed study,
everyone agrees that the potential problems with Social Security and Medicare
dwarf the short-term problems of balancing the budget.
"The issue is entitlements,'' said N. Gregory Mankiw, chairman of the
White House Council of Economic Advisers. "That is a huge challenge,
but it would be a challenge even if we had a balanced budget today.''
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