NCPA - National Center for Policy Analysis


April 27, 2005

Once a year, we get a look at the government's largest long-term financial liabilities when the trustees of the Social Security and Medicare systems issue their annual reports. The prose may be impenetrable, but it makes for interesting reading if one knows where to look, says Bruce Bartlett, a senior fellow with the National Center for Policy Analysis.

These figures have become the most revealing indicators of the true financial condition of our major entitlement programs, says Bartlett:

  • Starting with Social Security, we see that the present value of all future costs for that program less expected taxes in perpetuity is estimated at $13.7 trillion.
  • The $1.7 trillion currently in the Social Security trust fund is treated as if it is a real asset, which lowers the unfunded liability to $12 trillion.
  • Since those who do not yet qualify for Social Security benefits will get back less than they will pay in present value terms, it lowers the long-term cost by another $900 billion, for a net unfunded liability of $11.1 trillion -- $12.8 trillion if you don't believe there are really any assets in the trust fund.

In short, we would need about one year's gross domestic product in a bond fund somewhere, backed by productive tangible assets earning a real return in order to pay all of Social Security's promises without either raising taxes or cutting benefits, says Bartlett.

To make these very large numbers somewhat more concrete, Social Security's unfunded liability comes to 1.2 percent of gross domestic product (GDP) in perpetuity (1.4 percent without the trust fund) -- about what is currently raised by the corporate income tax. And remember that these figures are for the unfunded portion of these programs, so they are over and above payroll taxes, says Bartlett.

Source: Bruce Bartlett, "Medicare and Social Security's Unfunded Liabilities," National Center for Policy Analysis, April 27, 2005.


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