Social Security, Medicare Annual Report: Reform is Needed

by Matt Moore

The annual report on the financial health of Social Security and Medicare was published this week. Contrary to some accounts that it pronounced Social Security in better health than last year, the report concluded that Social Security's long-term prospects are deteriorating rapidly.

Typically, the Trustees report is an academic tome that requires a Ph.D. and a case of Vivarin to get through and understand. But this year's report contains new features that make it impossible to ignore the extent of the financial burden we will leave to our children and grandchildren if the two pillars of our nation's retirement system are not fixed soon, and how quickly the problem will be felt.

The only thing people typically focus on in the annual report is the date when the Social Security and Medicare Trust Funds run out of money - 2042 and 2026, respectively. The initial media coverage said Social Security has grown "stronger," since this year's report says the Social Security Trust Fund will be solvent for a year longer than previously expected. Of course, this overly reported statistic masks the truth - both Social Security and Medicare have gotten significantly worse since last year.

The report's authors make this point extremely well. Take this excerpt from the report:

"We believe public concern about the financial future of Medicare and Social Security tends to focus unduly on their trust fund exhaustion dates, when benefits scheduled under current law legally could no longer be paid in full." The problems actually begin much sooner, says the report, when Social Security and Medicare need more cash to pay benefits cash than the programs collect each year in taxes.

That date comes sooner than you think. Right now, Social Security and Medicare add money to the federal budget because the payroll taxes they collected is more than enough to cover the full costs of today's Social Security and Medicare benefits.

By 2008, however, Social Security and Medicare will stop adding money to the federal budget and will begin draining money away. By 2013, to pay full benefits the two programs will need about 5 percent of all federal income taxes - almost $100 billion - in addition to what they will collect in payroll taxes. By 2040, it will take nearly half of all the federal government's income tax revenue to pay for Social Security and Medicare - in addition to the payroll taxes they will already collect.

Of course, current law requires that Social Security benefits be cut to available funding, so if we don't agree to transfer all that federal budget money to Social Security and Medicare, we'll have to cut benefits for younger and future workers.

Social Security will be able to pay the benefits it owes current and near retirees, but younger workers - our kids and grandkids - are in trouble if changes are not made soon. Social Security promises $27 trillion more in benefits than it can afford to pay, a $1 trillion increase from last year's calculation. As a result, Social Security can only afford about two-thirds of our kids and grandkids' benefits.

We should leave our problems to our heirs; that's not responsible. What can we do? President Bush and others have proposed the idea of personal retirement accounts. The Bush plan would allow younger workers to set aside some of their Social Security money in a personal account that would be invested in the market. The account would earn a market return over the worker's life and would pay part of their Social Security benefits at retirement.

That's the benefit of personal accounts. Each worker would be saving part of his or her own Social Security benefits. Thus, Social Security's burden on future workers will be dramatically reduced.

While there are short-term costs to such a proposal, the cost of doing nothing is much higher. Further, benefits of reform for the long-term health of the program cannot be understated. Not only will our children be able to live knowing that their retirement is secure, but Social Security will no longer be a vacuum sucking resources from other important priorities, such as roads, schools and our nation's defense. Plus, personal accounts will stimulate economic growth and free up needed resources to fix Medicare.

The problems are clear. There are solutions on the table. We should act before it is too late.