A lack of trust (fund)
Two questions arise from a recent article from the Associated Press that begins: “An unexpected weakening in the finances of Social Security and Medicare…”
First, what’s unexpected about it? (Answer: it’s only unexpected if you haven’t been paying attention.)
And second, has this reported “weakening” become such a common alarm from the annual report of the Social Security and Medicare Trustees that it seems like they are crying wolf?
You tell me. I’ve written about the inevitable and growing problems with the programs frequently over the last 15 years or so. But I still don’t see any action from Congress, or even hear any complaints from members of the public.
Why should anyone complain?
For one thing, according to this year’s Trustee report, in 2018, Social Security and Medicare — which were designed to be pay-as-you-go programs, bringing in annual revenues sufficient to cover annual costs — will require an additional $416 billion from taxpayers or other government borrowing. For comparison, last year’s entire federal budget deficit was $668 billion.
One might object, and point out that this additional $418 billion is actually coming out of the Social Security and Medicare “trust funds.” Those are the funds that have been “collecting” the Social Security and Medicare payroll taxes that have exceeded the annual costs of the programs since the payroll rates were revised back during the Reagan administration.
A trust fund sounds reassuring, at first blush. If you or I were lucky enough to have one, we’d know we could draw on the assets they contained and spend away.
But the government’s so-called trust funds are simply Treasury Bills owed to one branch of the government by another branch of the same government.
As I’ve explained in a number of prior columns over the years, the excess payroll taxes collected in those boom years were actually fully spent at the time, just as if they were part of the government’s general taxpayer revenues.
That’s because our government doesn’t have a way to “put money aside” for a rainy day other than to issue promissory notes that are IOUs to itself.
Each year with a surplus, the government effectively said, “I’ll take this extra taxpayer money and use it to fund other programs (or to reduce this particular year’s deficit), and will promise myself to cover any shortfalls in future years to the extent I borrowed the money now.”
Furthermore, since the surplus is held in the form of special Treasury bonds, they “earn interest,” meaning the government agrees to pay itself interest each year on what it owes to itself.
Isn’t that nice? It not only obligates future generations to pay back the money spent in earlier years, but adds interest to the obligation.
Of course, we fully expect the government to make good on these promises, and it no doubt will. But the only way to do so, as the Trustees’ June report says, is “through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”
Let’s think about that for a moment. This year, it means we need either to raise taxes (which of course Congress has just done the opposite of, lowering taxes through last year’s tax bill), reduce other government spending (also a joke, given the increases in defense and other spending that the administration and Congress have been calling for), or increase the federal debt by an additional $416 billion.
Higher debt levels will most likely also be the outcome in each of the coming years that the trust funds are “tapped.”
You might ask, how much money are we talking about? The four separate funds that constitute the Social Security and Medicare trust funds currently total $3.18 trillion.
These obligations — and they are obligations — will be putting extreme pressure on annual budgets and future deficits for years and years to come.
And even when those trust fund obligations are paid off, Social Security and Medicare will still not be in a position to pay all the benefits promised to future retirees. The Trustee’s report notes that Medicare’s “projected insolvency” will occur in 2026 (just 8 years away), and Social Security’s in 2034 (16 years).
This all raises at least two more questions: Was this situation inevitable? (no) and What can or should we do about it now?
Stay tuned. I’ll address these in my column next month. Please let your anger percolate in the meantime!