Social Security, Medicare, & Medicaid - new challenges

The Congressional Budget Office (CBO) has come up with excellent insights into the solvency of the Social Security system and has identified its challenges. The CBO provides Congress with objective, timely, nonpartisan analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process. Below are excerpts from the testimony of Douglas Holtz-Eakin, Director of CBO. (Note: No edits, but headings added)

Most beneficiaries of Social Security are also the most vulnerable Americans

In 2004, only about two-thirds of Social Security's beneficiaries were retired workers; the rest were disabled workers, survivors of deceased workers, and workers' spouses and minor children. Policymakers will need to decide whether the program's goals are still appropriate, and if so, how changes to Social Security would aid or hinder the achievement of those goals and affect various types of beneficiaries and taxpayers. Those decisions will also need to take into account the dramatic increase in the elderly population that is expected in coming decades. (Related article: Women and widows to be hurt most from privatization of Social Security)

We have abused the Social Security surpluses by cutting taxes and over-spending

Annual Social Security surplus - the amount by which the program's dedicated revenues exceed benefits paid - will begin to diminish. That trend will continue until about 2020, when Social Security's finances will reach a balance, with the revenues coming into the system from payroll taxes and taxes on benefits matching the benefit payments going out. Thereafter, outlays for benefits are projected to exceed the system's revenues. (Related article: What happened to the trust fund?)

If nothing is done, benefits will need to be cut

To pay full benefits, the Social Security system will eventually have to redeem the government bonds held in its trust funds. But where will the Treasury find the money to pay for those bonds? Will policymakers cut back other spending in the budget? Will they raise taxes? Or will they borrow more? In the absence of other changes, the redemption of bonds can continue until the trust funds are exhausted. In the Social Security trustees' projections, that happens in 2042; in CBO's projections, it occurs about a decade later, largely because CBO projects higher real interest rates and slightly lower benefits for men than the trustees do.

Once the trust funds are exhausted, the program will no longer have the legal authority to pay full benefits. As a result, it will have to reduce payments to beneficiaries to match the amount of revenue coming into the system each year. Although there is some uncertainty about the size of that reduction, benefits would probably have to be cut by 20 percent to 30 percent to match the system's available revenue.

US Economy will be hurt by Social Security benefits as the budget deficits are too high already

By CBO's calculations, the Social Security surplus (excluding interest) will reach about $100 billion in 2010. But by 2025, that surplus is projected to become a deficit of roughly $100 billion (in current dollars). That $200 billion swing will create significant challenges for the budget as a whole.

Medicare and Medicaid are bigger problems than Social Security

The clear message is that while Social Security will place demands on the federal budget, those demands will coincide with much greater demands from Medicare and Medicaid.

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