NCPA - National Center for Policy Analysis


October 13, 2004

The latest reports of the Trustees of Social Security and Medicare calculate the present values of the cash flow deficits for both programs -- and the numbers are staggering. Social Security's funding gap for the next 75 years stands at $5.2 trillion. Medicare's unfunded costs come to $28 trillion, including $8.1 trillion added by the new prescription drug benefit. The combined $33.2 trillion shortfall is about three times the current size of our economy, says Thomas R. Saving, a senior fellow with the National Center for Policy Analysis.

Bleak as this picture is, over a longer horizon the situation is worse. Consider people retiring 76 years from now. The Trustees' 75-year calculation counts all of the payroll taxes these people will pay but ignores the benefits they expect to receive. To measure what happens after the 75th year and beyond, the Trustees now calculate the unfunded obligations over an infinite horizon. From this long-range perspective:

  • Social Security's long-run cash flow deficit is $11.9 trillion, and the new prescription drug benefit will require $16.6 trillion.
  • The total shortfall of Medicare Part A (hospital insurance, currently paid by taxpayers) and Part B (for doctors' services, three-fourths funded by taxpayers) is $45.3 trillion.
  • After payroll taxes and premium payments by the elderly, the unfunded liability of Medicare and Social Security combined totals more than $73 trillion -- about seven times the size of our economy.

Due to changing demographics and rising medical costs, the share of the nation's output consumed by the elderly will rise. It is this rising economic share (financed in large part by Social Security and Medicare transfers) that will drive a growing tax burden. Saving more now for retirement reduces the burden on future taxpayers while at the same time increasing the nation's capacity to produce, says Saving.

Source: Thomas R. Saving, "How Will We Pay for Social Security and Medicare?" Brief Analysis No. 490, National Center for Policy Analysis, October 13, 2004.

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