Saving Social Security and Medicare

The trustees’ reports for Social Security and Medicare were released on March 23, showing serious imbalances in the two programs. Later that day, I met with Dr. Tom Savings, who is a professor of economics at Texas A&M and one of the trustees for both programs. He calculated that the unfunded liabilities for the two programs amount to a staggering $72 trillion. To put that in perspective, that is more than ten times our entire national debt and more than 30 times the President’s recently proposed budget.

Unfunded liabilities represent the amount of money, in today’s dollars, that would have to be added to keep the programs going at present levels. These numbers assume the full repayment of what government has borrowed from the Social Security and Medicare trust funds. Since the IOUs in the trust funds are accounting entries and are not actual assets, the situation is actually even worse than that.

The unfunded liability means that taxes or borrowing will have to go up dramatically. Today, the Social Security and Medicare programs spend all the money coming in from payroll taxes and also consume an additional 3.6% of federal income tax revenues to pay for these programs. The percentage of income tax revenues necessary (in addition to payroll taxes) to keep the programs going is expected to rise rapidly. From 3.6% today, it will rise to 8.6% in 2010, to 28.6% in 2020, to 52.7% in 2030, and eventually to 101.6% of what the current system will bring in by 2070. It is evident that we won’t be able to transfer such large sums from general revenues without slashing all the other programs – from defense to education to health care to criminal justice – that the government funds. The seemingly simple solution of raising taxes would harm our competitive position and drive business and investment overseas.

This math means that Social Security and Medicare will have to change. If we do nothing, we will eventually be forced into the sort of painful and stop-gap measure that Congress enacted in 1983 when the Social Security was on the verge of insolvency. That law (which passed before I entered Congress) increased payroll taxes by over 20%, raised the retirement age by two years, and made Social Security benefits taxable for the first time. But if we act now on legislation to increase the return on Social Security contributions – and I have introduced my own version of this legislation – we can use the higher returns to avoid most of the unfunded liability.

With Medicare and Medicaid, there has to be more individual, common sense decisions to manage cost. Today, patients are in a position where reasonable and frugal decisions are not rewarded, and extravagant and wasteful decisions are not penalized because government pays for it. For example, some patients now take a taxi to the emergency room with minor illness when they could take the bus to a clinic instead and save government thousands. We need medical savings accounts and other incentives that make the patient profit or lose to slow down wasteful spending.

The bottom line is that Congress has to make some hard choices about which programs we need, which ones we can reduce, and which ones we can do without. It will be hard, because just about every program has its defenders. But it must be done in order to restore our finances to reasonable shape so we can leave a sound country to future generations of Americans.