Entitlements Spending Threatens Financial Future

October 23, 2003

In a recent article, Megan McArdle, a columnist for Tech Central Station, writes that not only does Social Security promise to rack up more zeros onto the already staggering deficits, the trust fund cushion—popularly thought to provide benefits well into the future—is not-so-trusty. Furthermore, McArdle suggests that by promising expensive entitlement programs to special interest groups, members of Congress are sacrificing the interests of those who share a stake in the U.S. economy—essentially everyone. Highlights of her column follow:

"[The Social Security and Medicare liabilities] are about to get a whole lot bigger if Congress succeeds in passing the expensive prescription drug bill with which legislators and the President hope to woo the senior vote in 2004.

"How big are those liabilities? The American Enterprise Institute has published a paper by Jagdeesh Gokhale and Kent Smetters that analyzes that question. According to their estimates, we, as a nation, have collectively promised to spend $44 trillion more than we have resolved to collect in taxes, almost all of it on Social Security and Medicare. If the United States government were a private company, we wouldn't just be in the red; we'd be in receivership.

"I know it's hard to get excited about the long-term solvency of Social Security, even if you are among the few Americans who has noticed that the Social Security and Medicare "trust funds" are slated to run dry sometime around 2040. After all, if you're over fifty, you probably won't live to see the day that the "trust" is exhausted. And if you're under thirty, you probably have emotional trouble actually imagining yourself needing a walker and a pillbox full of heavily subsidized drugs. That leaves a very narrow band of our citizenry willing to spend precious time worrying about the solvency of our old age programs.

"The problems won't start in some comfortably far off time. They'll start in less than ten years.

This is because "Right now… any excess Social Security taxes not needed to pay current benefits are lent to the government, which gives the 'trust fund' special purpose bonds in return. The 'trust fund,' in other words, is a big fat IOU written from Uncle Sam to itself.

"The AARP … alleges that the Social Security trust fund is 'a sure thing,' because after all, US Treasury debt is the safest investment there is …This is nonsensical.

"When the baby boomers retire… the surplus of taxes over expenses quickly vanishes … In 2002, the SSA received $78.7 billion more in taxes than it paid in benefits, money it forwarded to the federal government. When the boomers retire the money starts going the other way, and a gaping hole opens up in our budget.

"What matters is that in the not-so-distant-future, the federal government has to come up with north of $100 billion to make up Social Security's deficits. Now, how can the government do this? It has (ahem) four options. It can cut benefits so that outlays for Social Security and Medicare don't exceed what's collected in payroll taxes; it can raise taxes; it can cut other spending; or it can borrow the money.

"In other words, with or without the trust fund, when the expenses of Social Security and Medicare exceed the value of our contributions, our budget is suddenly going to have more holes than a warehouse full of Jarlsberg. And when does this happen? According to the Social Security trustees, [Social Security's] expenses start to exceed benefits 2018.

"The ticking time bomb is still comfortingly out of sight -- but it will blow up, as Gokhale and Smetters have illustrated … When [members of Congress] promise money they don't have to special interest groups on such a titanic scale, our legislators violate their fiduciary responsibility to the taxpayers. Its time that we called our lawmakers to account, and forced them to live within our means."

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