Tuesday, May 12, 2009

Medicare and Social Security Going Broke

As we see the developments in Social Security and Medicare Trust Funds a few thoughts come to mind...

What Are the Trust Funds?

Congress established the trust funds in the U.S. Treasury to account for all program income and disbursements. Social Security and Medicare taxes, premiums, and other income are credited to the funds.

How big are Social Security and Medicare?

Social Security is currently 4.4% of GDP. Medicare is currently 3.2% of GDP.

When do these entitlements start paying out more than they bring in?

In the case of Social Security, 2016. In the case of Medicare, today. Medicare is already losing money.

There are actually four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. (The two trust funds are often considered on a combined basis designated OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit.

Medicare Cost and Non-Interest Income by Source as a Percent of GDP

Concern about the long-range financial outlook for Medicare and Social Security often focuses on the exhaustion dates for the HI and OASDI Trust Funds—the time when projected finances under current law would be insufficient to pay the full amount of scheduled benefits. A more immediate issue is the growing burden that the programs will place on the Federal budget well before the trust funds are exhausted.

The Medicare Modernization Act (2003) requires that the Board of Trustees determine each year whether the annual difference between program outlays and dedicated revenues (the bottom four layers of the chart above) exceeds 45 percent of total Medicare outlays within the first 7 years of the 75-year projection period. In effect, the law sets a threshold condition that signals that a trust fund's dedicated financing is inadequate and/or that general revenue financing of Medicare is becoming excessive.

Projected OASDI and HI Tax Income Shortfall plus the 75-Percent General Fund Revenue Contribution to SMI
(Percentage of GDP)

The combined difference grows each year, so that by 2016, net revenue flows from the general fund would total $369 billion (1.8 percent of GDP). The positive amounts that begin in 2016 for OASDI, and started in 2008 for HI, initially represent payments the Treasury must make to the trust funds when assets are depleted to help pay benefits in years prior to exhaustion of the funds. Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

The chart above shows that the difference between outgo and dedicated payroll tax and premium income will grow rapidly in the 2010-30 period as the baby-boom generation reaches retirement age. These Trust Funds are not to be trusted... This is the greatest Ponzi scheme ever!

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