The Social Security and Medicare trust funds should offer no comfort as the obligations of those programs outrace revenues. Between them, the funds hold about $3.1 trillion of federal government bonds purchased with past surplus “contributions” from FICA and Medicare payroll taxes. In other words, those surplus contributions were used to pay for past government deficits. Here’s what Warren Meyer has to say on the topic:
“Imagine to cover benefits in a particular year the Social Security Administration needs $1 billion above and beyond Social Security taxes. If the trust fund exists, the government takes a billion dollars of government bonds out and sells them to private buyers on the open market. If the trust fund didn’t exist, the government would …. issue a billion dollars in bonds and sell them to private buyers on the open market. In either case, the government’s indebtedness to the outside world goes up by a billion dollars.”
Therefore, the trust funds do not provide any real cushion against future obligations. As Meyer says, you can write IOUs to yourself, put them in a piggy bank and call it a trust fund of your very own, but that won’t increase your wealth.
As it happens, last week the Trustees of the Medicare (MC) Trust Fund released the latest projections showing that it will be exhausted by 2026. Likewise, the Trustees of the Social Security (SS) Trust Fund reported that it will be depleted by 2036. But again, those trusts do not enhance the federal government’s fiscal position, so they really don’t matter. Even with the interest earned on the bonds held in trust, which is itself owed by the federal government, the trusts are merely placeholders for an equivalent dollar value of unfunded federal obligations. And in a very real sense, these funds hold no more than our own future tax liabilities: that debt is our debt.
Federal spending on discretionary and other on-budget entitlements is deeply in deficit on an ongoing basis, expected to be greater than $1 trillion annually by 2020, according to the Congressional Budget Office. Then add the bonds that will be sold to the public from the SS and MC trust funds, and total government borrowing from “the public” will become that much larger. After the trust funds are exhausted, accounting for the impact of the annual SS and MC system deficits will be more transparent.
The previous use of SS and MC contributions to pay for other government outlays strikes many as a violation of trust. Remember, however, that contributions to these systems are taxes, after all. And despite apparent impressions to the contrary, and perhaps for worse, individual vesting was never part of the SS system. But if the government must borrow a dollar (on a unified basis), is it always better to do it later? That was essentially the decision made (repeatedly) when FICA and Medicare taxes were used to purchase government bonds. The answer depends on whether the government has an immediate uses for the surplus that can be expected to earn returns superior to investment opportunities of suitable risk otherwise available to the trust funds. I would argue, however, that most of the “spent” funds from surplus FICA and Medicare taxes were put toward government consumption, and much less to investment in physical or social infrastructure. In fact, the availability of the SS and MC surpluses probably encouraged that consumption. To that extent, it was a certainly a mistake.
If the question is at what point must the government address the shortfall in its ability to pay future obligations to seniors, the answer is not “2026 and 2034”. It is now. The programs are racking-up obligations to future retirees that will be impossible to meet. The long-run (75-year) SS deficit projected by the trustees has a present value of $13.2 trillion, with an annual deficit growing to about 1.5% of GDP. By then, the Medicare deficit is expected to bring the combined shortfall of the two programs up to 2.3% of GDP. The trustees estimate that SS benefits would have to be cut by 25% in order to eliminate that deficit, with additional cuts to Medicare.
Oh, but those estimates treat the trust funds as if they are meaningful assets, and they are not! Of course, there are other solutions to the funding shortfall, but I truly hope that current workers have realistic expectations. They should adjust their saving rates to avoid excessive reliance on government social and medical insurance programs.