Henry Paulson is rolling out the Social Security Bogeyman

You got to love the predictability of conservatives. We get a new report that looks at the financial difficulty of Medicare, Medicaid and Social Security, and we hear Social Security. The audio clip I heard on the way home, Secretary of the Treasury Henry Paulson talk about Social Security, not Medicare. You could blame this on the media, but I think as you will see in this post, that Paulson also deserves blame.

In fairness Paulson’s statement does discuss Medicare and even points out that it is a more urgent issue.

The 2008 Medicare Trustees Report shows that the Medicare program poses a far greater financial challenge than Social Security. Medicare faces the same demographic trends as Social Security, and, in addition, the system must cope with expected large increases in health care costs. Medicare’s annual costs were 3.2 percent of GDP in 2007, or nearly three-quarters of Social Security’s, but are projected to surpass Social Security expenditures in 2028 and reach nearly 11 percent of GDP in 2082, compared to 5.8 percent for Social Security.

Yeah, a conservative is pointing out that Medicare needs help, and quickly. Not only that, but if trends continue, it will be a bigger burden than Social Security as a percentage of GDP.

But see the problem is Medicare, the more urgent problem, but is after Social Security in his statement. I see that is trying to scare us on Social Security getting him a bogeyman call out.

This year’s Social Security Report again demonstrates that the Social Security program is financially unsustainable and requires reform. In fewer than 10 years, cash flows are projected to turn negative–meaning that we will draw upon general revenues to support withdrawals from the Trust Funds in order to pay current benefits. The Trust Funds are projected to be exhausted in 2041, the same as projected in last year’s Report. Reform is needed and time is of the essence. The longer we delay, the larger the required adjustments will be and the more heavily the burden of those adjustments will fall on future generations.

Social Security’s unfunded obligation–the difference between the present values of Social Security inflows and outflows less the existing Trust Fund–equals $4.3 trillion over the next 75 years and $13.6 trillion on a permanent basis. To make the system whole on a permanent basis, the combined payroll tax rate would have to be raised immediately by 26 percent (from 12.4 percent to about 15.6 percent), or benefits reduced immediately by 20 percent.

This Report confirms the need for action; the sooner we take action to strengthen Social Security’s financial footing, the less drastic the needed reforms will be, and the fairer reforms will be to future generations. President Bush has called for bipartisan solutions that generate a permanently sustainable Social Security system. The President has put forward a number of well-considered ideas. We now need serious and thoughtful engagement from all sides to make sure Social Security is strengthened and sustained for future generations.

$4.3 trillion over 75 years seems like a lot. But if you divide $4.3 trillion by 300 million Americans, that is only $14,333.33 per person (over 75 years) or $191.11 per person per year for 75 years. Or if you get paid twice a month $7.96 per paycheck (or $7.35 per paycheck if paid every two weeks) A little less scary when you break it down that way.
Now I am unable to find the 75 year deficit for Medicare in the new report (I was lazy, it is 242 page pdf), but looking back to that special little powerpoint presentation to the AARP, I am guessing it is high, much higher than Social Security.

page 9

As I wrote previously, based on last year’s data, the liability exposure for Social Security and Medicare shows that 83.3% of it comes from Medicare, not Social Security. Combining that information with the fact that Medicare trust fund will run out sooner than Social Security (see thumbnail below), it makes you wonder if anyone can shut up about Social Security and focus on Medicare.

Medicare trust fund

As I have said before, if conservatives want to have an honest discussion, they need to start a discussion on Medicare and only Medicare, not drag Social Security into this.

-Josh

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2 Comments

  1. bluecollardollar said,

    March 26, 2008 at 8:24 am

    I would have to agree with your assessment of how much of the problem is actually real and how much is just hype. Social Security should not be lumped into the discussion about Medicare and Medicaid. But one thing strikes me as odd when they are packaged as one entitlement program: the surplus that SS currently has, coupled with the IOUs that the general revenue has taken from previous year’s surpluses and the elimination of the costly drug program that Mr. Bush said would save millions, would bring the program to almost even.

    But I was thinking of another way. It is widely considered fact, that the recent actions of the Fed, stepping in before Bear Stearns could collapse is a good thing if, and this is a very big IF, they can hold the securities they guaranteed until maturity. Could this be a way to fund SS without buying Treasuries? Perhaps the surplus in SS could be used to secure mortgage backed securities and, if they held them long enough, would be highly profitable. The side effects of this are obvious to homeowners and the thinly traded securities would attain a value relative to the underlying security, the home that backs the loan.

    Your thoughts?

  2. Bill Woessner said,

    March 26, 2008 at 10:22 pm

    I agree with your math for solving Social Security’s problems. However, I don’t agree with the fix. Social Security is already a bad deal for younger workers. Asking them to pay more is just going to make it worse. At what point do we acknowledge that the demographics are such that the system cannot provide a benefit to the average American worker? It’s time to scrap the system and replace it with something better.


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