Entitlement spending gone wild or the Social Security bogeyman

Social Security must be fixed now, you will hear this over and over again. But is that where the urgency lies? No, the urgency should focus on the runaway costs of health care which we see in entitlement programs in the form Medicaid and Medicare.

Apparently the GAO presented a nice powerpoint presentation to AARP board of directors on Valentine’s Day. Here is the PDF of the powerpoint.

I think page 3 is good place to start.

page 3

On this page you will find three pie charts representing where federal money is allocated in the years 1966, 1986, and 2006. Medicaid and Medicare are rolled together and shown in red. Now keep in mind that these two programs started in 1965, so the 1% amount in 1966 is probably attributable to the newness of the program and the time it took to implement it. Now if you look at 1986 and 2006, these programs went from 10% to 19% of federal spending. Over the same period, Social Security, show in yellow, went from 20% to 21% of federal spending.

Now on to page 12, we see four bar graphs.

page 12

This page scares me, but not because of Social Security or Medicaid and Medicare, but because of the ballooning net interest. It looks like it is 10% of GDP in 2040. There is also the assumption that expiring tax provisions are extended. Does that mean Bush’s tax cuts??

Now page 14 is a better look at the growth of Social Security, Medicaid and Medicare over time as a percent of GDP.

page 14

I see a gradual bump to about 5% from now through 2030, my assumption baby boomers, for Social Security. But look at the growing monster that is Medicare, and to a lesser extent the growing Medicaid. So what is the pressing problem? Oh yeah, it is Social Security, but only if you are blind.

Now page 25 gets to when different aspects of Social Security will change financially.

page 25

I am going to focus on the third column, OASDI, as it combines the first two columns. The first row is the year in which the amount of money added to the trust starts to decline, and oh no it is 2009, just next year. But wait, what does this really mean? This actually about calculus, the whole rate of change concept, which is more scary than the misleading description.Looking at the 2007 Social Security Trustees report. It isn’t that scary, the OASI adds $183 billion in 2007, $204 billion in 2008 (a $21 billion increase from 2007), $223 billion in 2009 ($19 billion increase from 2008), $237 billion in 2010 ($14 billion from 2009). So while the amount added to Social Security Trust Fund is slowing, it is still increasing from year to year, and over the four years I mention above, it adds $847 billion dollars in 4 years.

Now on to the second row, this is the year that the revenue no longer covers the expenditures. However, since the federal government has borrowed against the Social Security surplus, then they can cover the gap in the amount with the interest on what the federal government has borrowed. On to the third row, this is the year in which revenue plus interest (paid by federal government) no longer cover the expenditures. It is at this point the Social Security Trust Fund will start cashing in its bonds. The fourth row is when the bonds are all cashed out, and either revenue must be increased via taxes, or expenditures must be reduced via benefit reductions.

This is serious stuff, but if you go back to the earlier charts I mentioned the scariest explosion in entitlement obligations is in Medicaid and Medicare, not Social Security. As a society we need to focus our efforts in that area. The battle will not be easy because it will probably need a total restructuring of our fragmented and grossly inefficient private health insurance system.

Now you may wonder why I titled this the Social Security bogeyman. My belief, my prediction, is that Republicans and their masters in the investor class, the folks that fund the right wing think tanks, are aware that when the Social Security Trust Fund stops having a surplus, that the tax man will come, and it will come for a bigger share of the investor classes income than we have seen since Reagan come to power. The only thing that might scare the investor class more is the need for protection from relatives in the year the estate tax is 0%. The way to put off this day of reckoning is trot out the Social Security bogeyman. Hopefully the mainstream press will figure out this is right wing crying wolf, and it is getting old.

UPDATE: Looking at page 9, the implicit exposure in 2007, shows that Medicare Part D $8.4 trillion, that new prescription drug program, is greater than Social Security $6.8 trillion. Or 16.67% of the implicit exposure, the other 83.33% is all from Medicare Parts A, B, and D.

page 9

-Josh

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1 Comment

  1. August 9, 2008 at 10:33 am

    [...] if you look at his power point presentation, which I have in a previous blog, it shows that the real problem is Medicare and Medicaid, here it is [...]


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