The Social Security/Medicare Trustees have issued their latest reports and they are not easy reading for the uninitiated. I suspect most of the Trustees hope you don’t read them at all. They prefer their own spin. Under both Republican and Democratic administrations, these reports are invariably accompanied by a press release that completely ignores what is important and focuses instead on what is unimportant.
What’s unimportant? The trust funds and when they will run dry. Like most social security systems in the world today, ours is a pay-as-you-go system. Nothing has been saved or invested. What we call trust funds consist of nothing more than IOUs the government has written to itself. (More on that below.) Yet, that is what the official press releases emphasize and this focus is reflected in the first graph below.
What’s important? Cash flow. In fact, in a pay-as-you-go system, cash flow is the only thing that matters. As the second graph shows, Social Security and Medicare are paying out more than they are taking in. As the baby boomers retire, the total deficit will grow dramatically. Currently, we are using about one in every seven general revenue dollars to cover these deficits. By 2020, we will need more than one in five. By 2030, we will need about one in three.
That implies that in order to fund Social Security and Medicare benefits at their current levels and at the same time balance the budget, in just five years the federal government will need to stop doing about one out of every five other things it is currently doing. In just 15 years, the government will need to stop doing about one out of three other things it is currently doing. Clearly, elderly entitlements are on a course to crowd out all other federal programs.
This post was published at David Stockmans Contra Corner on August 11, 2015.
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