March 31, 2004
Recently the trustees of the Social Security and
Medicare systems made two important findings.
They announced that under current law and prevailing growth assumptions,
social security will remain solvent until 2042. Medicare will run out of cash under these conditions by 2019.
The social security date was unchanged from the previous
assessment. However, medicare was
expected to exhaust its cash six years earlier than previously.
The passage of the prescription drug measure and its subsequent cost
revisions led to the latter conclusion.
In fact, neither fund has cash accumulated for future
needs. Instead, the Treasury
accounts for the receipts from payroll taxes and the benefits provided to the
two programs and notes whether the difference is positive or negative.
This is added to the accumulated surpluses in the programs, but only the
good faith and credit of the government even now supports these benefits.
That either fund runs out of resources to support promised benefits means that actuarial problems exist with the programs. For social security, the current value of expected liabilities exceed expected revenues by almost $3 trillion. The liability is less for medicare, as the program is smaller, but the deficit exceeds $1 trillion.
When such problems develop for private pensions, the
entities supporting those pensions must divert income to increase the pension
pool, even if it creates a loss for those entities. For instance, IBM put well over a billion into its pension
programs in the past few years to assure that pensions will be there when
Not only are these government programs not required to
remove actuarial deficits at all deliberate speed, but they also are not
receiving adequate investment returns for the surpluses currently being created
in the programs. The fund surpluses
only receive credit as if they were invested in short duration government bonds.
Any private program that had such an investment objective would be
subject to legal suit for violating fiduciary responsibility.
Frankly, the Presidentís request and the Congressís
acquiescence in adding to the actuarial liability of the medicare program, when
it already had problems, would not be permitted in the private sector.
The inadequate funding of new benefits should have received much more
attention than it did.
At a minimum, future benefits from these programs are put
at risk. Federal Reserve Chairman
Alan Greenspan already has mentioned a combined reduction in benefits (or at
least a further delay in receiving them) and increase in taxes to improve the
soundness of social security. And
that programís position has not deteriorated as much as medicare.
Alternatively, tax increases may be needed in the future to
assure the soundness of these government retirement programs.
A minor palliative can be achieved by establishing a true
fund and investing the proceeds to achieve higher returns over time.
Of course, that would require putting more than $1 trillion of government
debt into the market place (that is about the size of the accumulated surpluses
between benefits and payroll taxes that are on the books currently).
As the fund managers would have that trillion to invest,
the impact upon financial markets might not be dramatic. However, any shift from government to private demand for
financial assets of that magnitude would have some impact upon the economy.
(Despite the positive demand for equities, I would assume that the higher
interest rates that probably would prevail would have a greater restraint on the
economy than the higher equity values could offset.)
The Presidentís solution of creating private investment
accounts managed by individuals would lower the actuarial deficit but accelerate
the cash flow shortfall. In other
words, the social security actuarial deficit would shrink but the absence of
some contributions would exhaust social security funds even sooner than
Although experts will debate the merits of the current
prescription drug program, having a medical program that includes drug therapy
makes much more sense than medicare prior to the Presidentís initiative.
Hospitals should not be used to get prescriptions, which is almost the
only way the old indigent can get funded drug therapy today.
Therefore, we must develop a comprehensive program that is
adequately funded or admit to the children of our seniors that they will not
receive the same benefits that currently are available to their parents.