It's Not That Social Security Will Run Out Of Cash - It's Whether Taxes Will Rise To Fund It

(Forbes.com) - We’re getting the usual scare stories about Social Security and Medicare running out of cash in a couple of decades’ time. This isn’t going to happen, it really just isn’t going to happen. The story is not at all whether those trust funds get spent or not. It’s whether anyone will raise taxes to pay for the benefits already promised or not. The two government programs simply are not in a position akin to a private or lower level government program which has overpromised benefits and under reserved to pay for them. It is true that the promises have been over generous and that the current taxation and reserves to pay for them too little but the system is underpinned by the full financial might of the US Government. And if we’re about to worry about the solvency of that then we’ve all got much greater problems than whether pensions continue to be paid. The true point is that the Federal government has taxing rights on the entirety of the US economy. The question is not whether there’s enough they can raise from that to pay the bills due, it’s whether they’ve the political will to do so.

These concerns come up every time the Social Security and Medicare trustees revise their actuarial predictions:

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes the 2016 Annual Reports.

Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs. The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

The essential background here. Ever since the last major reform of the tax rates in the Reagan era tax revenue collected to pay for these benefits has been higher than the expenses paid out. Well, it was for a long time at least. The bulk of that collected this month is paid out next month as benefits to those currently receiving them. There is no true investment fund here, this is what is called a “pay as you go” pension scheme. In those years that revenue was greater than costs then the surplus was invested in Treasury bonds. This is that “trust fund” we hear so much about. More recently payouts have been higher than current revenues so that trust fund has been declining. and at some point in a couple of decades time that fund will be exhausted. No, this does not then mean that Social Security will go bust:

Here’s When Social Security and Medicare Will Officially Run Out of Spare Cash
The clock is ticking on Social Security and Medicare.

No, not really.

In the case of Social Security, the ongoing retirement of baby boomers is straining the program. As more boomers leave the workforce, there simply won’t be enough payroll tax revenue generated to cover the cost of benefits being paid out. Between 2015 and 2035, the worker-to-beneficiary ratio is expected to fall from 2.8-to-1 to 2.1-to-1.

The other issue for Social Security is that people are living longer than ever. I don’t want to misconstrue this as a bad thing — a longer life expectancy is great news for everyone. But for a program that’s been designed to pay out benefits for a certain period of time, longer life expectancies are proving to be a strain.

Many of the same problems are apparent for Medicare.

Now that is true. The demographic bulge of the baby boomers is moving through the system into retirement and we’re all living longer to boot. The taxes we are currently charging to people currently working won’t be enough to cover those bills. And the amount we’ve got saved from the past will delay that a bit but we’ll still end up in the same place – the current tax revenue won’t cover the costs of what has been promised. (Full Text)