TCS Daily

The Bad News Is the Good News Is Irrelevant

By Megan McArdle - October 15, 2003 12:00 AM

We finally had some good news from the Congressional Budget Office this month. After what seemed like an endless series of dismal reports in which budget surpluses beyond dreams of avarice dissolved into an ocean of red ink, economists at CBO sheepishly reported that they now believe that in the fiscal year just ended our actual deficit was about $25 billion less than the one they were forecasting as recently as September. And while we were still breathing a nice national sigh of relief, they offered still more glad tidings: the $87 billion President Bush is requesting for the reconstruction of Iraq was mostly already built into their forecasts, which means it will hardly budge our projected deficits.


But don't put the cap back on the Valium bottle just yet. Just like the numbers before them, our new budget forecasts are unlikely to be very accurate; remember, we just went from eye-popping surplus to staggering deficit in the space of three short years. And even if they were accurate, they're missing some major data: our unfunded liability for Social Security and Medicare. Liabilities which are about to get a whole lot bigger if Congress succeeds in passing the expensive prescription drug bill with which legislators and the President hope to woo the senior vote in 2004.


Liability Problems


How big are those liabilities? The American Enterprise Institute has published a paper by Jagdeesh Gokhale and Kent Smetters that analyzes that question. According to their estimates, we, as a nation, have collectively promised to spend $44 trillion more than we have resolved to collect in taxes, almost all of it on Social Security and Medicare. If the United States government were a private company, we wouldn't just be in the red; we'd be in receivership.


I know it's hard to get excited about the long-term solvency of Social Security, even if you are among the few Americans who has noticed that the Social Security and Medicare "trust funds" are slated to run dry sometime around 2040. After all, if you're over fifty, you probably won't live to see the day that the "trust" is exhausted. And if you're under thirty, you probably have emotional trouble actually imagining yourself needing a walker and a pillbox full of heavily subsidized drugs. That leaves a very narrow band of our citizenry willing to spend precious time worrying about the solvency of our old age programs.


But if you are having difficulty keeping your mind focused on the problem, I think I can help: the problems won't start in some comfortably far off time. They'll start in less than ten years.


I imagine I now have your attention. Let me explain.


How Trusty Is the Trust?


Right now, the extra money that Social Security and Medicare take in is not, as many imagine, stuck away in a vault somewhere. Any excess Social Security taxes not needed to pay current benefits are lent to the government, which gives the "trust fund" special purpose bonds in return. The "trust fund," in other words, is a big fat IOU written from Uncle Sam to itself.


Why is this a problem? The AARP, which seems to have as its main purpose ensuring that Social Security remains "the third rail of American politics" -- touch it and you die -- alleges that the Social Security trust fund is "a sure thing," because after all, US Treasury debt is the safest investment there is. To see why this is nonsensical, let's consider two scenarios for Social Security, one without the trust fund, and one with.


Without the trust fund, when the baby boomers begin to retire, and the cost of their benefits begins to exceed the amount of money everyone else is paying into the system, the federal government will have to make up the shortfall. The government has four ways of doing this. It can cut benefits, so that the amount paid out in benefits matches the amount paid in in contributions. It can raise taxes, to cover the extra spending. It can cut other spending in order to make up the shortfall. Or it can borrow the money from someone else.


But we do have the trust fund, the AARP argues; therefore, we don't need to worry about reform just yet. It's safe for quite some time.

Well, let's see what happens when the baby boomers start to retire under scenario two.


Before the baby boomers retire, when the federal government pays "interest" on those special purpose bonds, it's really just an accounting entry: because the Social Security Administration doesn't need the money, the "interest" is promptly lent back to the federal government, increasing the value of the bonds the SSA has on the books.


When the baby boomers retire, however, the surplus of taxes over expenses quickly vanishes. While interest "income" may still be increasing the accounting entry for bonds on the SSA's books, in the real world cash flows suddenly reverse direction. In 2002, the SSA received $78.7 billion more in taxes than it paid in benefits, money it forwarded to the federal government. When the boomers retire the money starts going the other way, and a gaping hole opens up in our budget.


That money will be sent as interest payments, which somehow reassures the advocates for the Social Security status quo. But it doesn't matter whether we send it as a check for interest, or as a big pile of cash wrapped up in a pretty bow; what matters is that in the not-so-distant-future, the federal government has to come up with north of $100 billion to make up Social Security's deficits, and the deficit in its own books left when the cheap money from the SSA disappears.


Now, how can the government do this? It has (ahem) four options. It can cut benefits so that outlays for Social Security and Medicare don't exceed what's collected in payroll taxes; it can raise taxes; it can cut other spending; or it can borrow the money.


In other words, with or without the trust fund, when the expenses of Social Security and Medicare exceed the value of our contributions, our budget is suddenly going to have more holes than a warehouse full of Jarlsberg. And when does this happen? According to the Social Security trustees, Medicare's expenses start to exceed benefits in 2013, less than ten years from now. Social Security follows suit in 2017. 2040 isn't the date when we need to start worrying; it's the date when we finally give up pretending that Social Security is anything other than a gigantic Ponzi scheme, and the suckers revolt.


Violating Fiduciary Responsibilities


And where does this gigantic, worrying liability appear in our budget forecasts? Nowhere, yet. The White House Office of Management and Budget's figures go only as far as 2008. The Congressional Budget Office's budget projections go to 2013, but in the first year of Medicare deficit the effect is too small to show up. The ticking time bomb is still comfortingly out of sight -- but it will blow up, as Gokhale and Smetters have illustrated.


And what are our elected officials doing about this looming crisis? Why, with the able assistance of groups like the AARP, they're actively looking for ways to make it worse. Congress is currently labouring assiduously to increase our Medicare costs by $400 billion in the next decade with a new prescription drug benefit. Even if the new program manages to keep from going over budget -- an event which the history of Medicare spending renders unlikely in the extreme -- it will drastically advance the date when the hidden liabilities of our old age programs reveal themselves, with a vengeance.


That seniors groups should agitate for such programs, and labor to mislead the public about their costs, is understandable, if reprehensible. But that congress should abet them when Social Security and Medicare are already pushing us into insolvency, is lunacy. We are long past the day when any of us can ignore the issue, hoping that someone in some comfortably distant future year will solve the problem for us. Many of the legislators voting for the prescription drug bill will still be in Congress when its finances start to fall apart; most of their constituents will be alive and working when the taxman comes to collect on a debt they didn't know they'd guaranteed. There's no excuse for such profligacy. When they promise money they don't have to special interest groups on such a titanic scale, our legislators violate their fiduciary responsibility to the taxpayers. Its time that we called our lawmakers to account, and forced them to live within our means.


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