THINKING ABOUT TOMORROW

December 3, 2008

Social Security and Medicare are on a course to eventually crowd out every other government program or usher in a significantly larger federal government, say economists Andrew J. Rettenmaier and Thomas R. Saving.

One way to look at the funding problem is to apply the same accounting standards used by private corporations and state and local governments.  Suppose Social Security and Medicare were ended tomorrow -- collecting no more payroll taxes and allowing no more accrual of benefits.  How much would be owed current retirees and workers in benefits they have already earned?  Answer: 

  • An estimated $9.5 trillion is owed to current retirees -- an amount equal to almost $250,000 per person 65 years of age and older in 2008.
  • Adding the liability owed to those nearing retirement (55 and older) more than doubles the accrued debt to $20.6 trillion.
  • Adding the benefits accrued by younger workers brings the total to as much as $52 trillion.

Since this amount has not been set aside, funding accrued benefits by themselves will require an amount equal to 54 percent of federal income taxes, for the next 100 years (by the end of the 100 year period, all the workers who have accrued benefits will have died).

Fortunately, there is an alternative, say Rettenmaier and Saving.  Social Security and Medicare can be reformed so that each worker saves and invests funds for his own post-retirement pension and health care benefits.  The burden for the current generation of workers would be substantial:  saving for their own benefits while at the same time paying taxes to fund the benefits of current retirees.  However, over time Social Security and Medicare would be transformed from pay-as-you-go programs in which each generation is dependent on the next generation of workers/taxpayers into funded programs in which each generation pays its own way.

Source: Andrew J. Rettenmaier and Thomas R. Saving, "Thinking About Tomorrow," National Center for Policy Analysis, Study No. 317, December 3, 2008.

For text:

http://www.ncpa.org/pub/st317/

 

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