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Economic News, Data and Analysis

SSI and Medicare budgetary woes

In case you’ve forgotten or have been distracted lately, there is still a looming Social Security and Medicare problem…

The Impact of Social Security and Medicare on the Federal Budget
Summary
The difference between the income and expenditures credited to the trust funds of the Social Security and Medicare programs, the nation’s two largest social insurance programs, is often viewed as a measure of the impact that those programs have on the financial condition of the federal government. Under the Congressional Budget Office’s latest budget projections for the next 10 years, those trust funds are estimated to run sizable surpluses. However, those surpluses reflect more than an excess of dedicated revenues over spending. A substantial portion results from internal transfers between Treasury accounts–credits from the general fund of the Treasury to the trust funds. Thus, although the trust fund surpluses may accurately reflect the programs’ spending authority, using them to gauge the programs’ budgetary impact distorts their net effects.
That distortion, which is large, obscures the growing strains that the programs are placing on the government’s finances. When the intragovernmental transfers are excluded, instead of running a combined surplus of $3.3 trillion over the next 10 years, the two programs are expected to run a deficit of $96 billion. Similarly, from 2003 to 2026, instead of running a cumulative surplus totaling $6.5 trillion, as estimated by the Social Security and Medicare trustees, the programs would run a cumulative deficit totaling $6.6 trillion.
Expressed as a percentage of the nation’s gross domestic product, spending for the programs under the trustees’ projections would rise from 6.7 percent today to 12.1 percent in 2040, while revenues for the programs would hover around 7 percent. Trust fund accounting, which by law includes intragovernmental transfers, masks much of that widening gap and thus the growing amount of resources that may have to be drawn from the economy to cover the programs’ expenditures.
The looming fiscal strains are not a temporary phenomenon caused by the retirement of post-World War II baby boomers over the next few decades. They reflect a growing imbalance driven by currently prescribed entitlements as well as long-lasting and powerful demographic trends that could have major unfavorable consequences for the economy. Enacting changes to the Social Security and Medicare programs sooner is better than enacting them later because future beneficiaries would have longer to prepare, because the revisions could be less drastic, and because the changes could enhance economic growth.

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Filed under: Policy

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