Monday, September 28, 2009
U.S.S. Entitlement a Sinking Ship
According to our own government, we're just a decade away from the next two fiscal mega-crises.
"We suffer from a fiscal cancer and if we don't treat it, it could have catastrophic consequences for our country. This is not only an issue of fiscal irresponsibility; it's an issue of immorality."— Former US Comptroller General, David Walker
In May, the trustees of the Social Security and Medicare programs announced some rather bleak news: the Medicare fund is expected to run out of money in 2017, two years sooner than projected last year. And the Social Security trust fund will be exhausted in 2037, four years earlier than previously predicted.
Social Security is the main source of income for more than half of older Americans.
Spending on the two entitlement programs totaled more than $1.4 trillion last year, accounting for more than one-third of the federal budget. Medicare-Medicaid cost $739 billion and Social Security accounted for $700 billion of federal spending.
And those enormous expenditures will soon exceed revenues.
Due to high levels of national unemployment, the government is collecting less of the payroll taxes that finance Medicare and Social Security.
Compounding the problem, unemployed seniors are now choosing to claim early retirement benefits, which will force Social Security to pay out more in benefits than it collects in taxes for the next two years. That hasn't happened in a quarter century.
Applications for retirement benefits are up are 23 percent from last year, while disability claims have risen by about 20 percent. That will result in deficits of $10 billion in 2010 and $9 billion in 2011, all of which will be tacked on to already bloated federal deficits.
Nearly 2.2 million people applied for Social Security retirement benefits from start of the budget year in October through July, compared with just under 1.8 million in the same period last year.
According to the Social Security Administration, applications for disability benefits—including Supplemental Security Income—are on pace to reach 3 million in the budget year that ends this month and even more are expected next year. In a typical year, about 2.5 million people apply for disability benefits.
Social Security is projected to begin temporarily generating surpluses again in 2012 before permanently returning to deficits in 2016 — unless Congress acts to shore up the program again as it did in the early 1980s. That will ultimately result in higher taxes and lower benefits.
A resumption of economic growth is not expected to close the financing gap. The trustees’ bleak projections already assume that the economy will begin to recover late this year. However, future economic growth may be limited and any optimistic projections are highly speculative.
The government claims that the Social Security trust fund — reflecting a $2.5 trillion surplus that Uncle Sam borrowed, spent and promised to pay back — will be tapped out by 2037. Barring any changes, it claims that is the point after which the system would only be able to pay out 78% of benefits promised to future retirees.
However, there is no actual trust fund. The money has already been spent. Recouping that money will require taxing workers all over again, or making drastic cuts to other federal programs in order to return that money to retirees.
The trust fund was callously raided by Congress over the years as it spent future retirees money on other government programs. The fund is now represented by government bonds, or IOUs, that will have to be repaid as Social Security surpluses are permanently exhausted.
The government already owes trillions in bond obligations to public and private investors, including foreign governments. You could say that Uncle Sam's obligations are ocean deep.
And Medicare presents its own pressing, and more immediate, problems.
Last year was the first year in which Medicare collected less in taxes and premiums than it paid out in benefits.
In coming years, the trustees said, Medicare spending will increase faster than either workers’ earnings or the overall economy.
The trustees predict a 30 percent increase in the number of Medicare beneficiaries in the coming decade, to 58.8 million in 2018, from 45.2 million last year.
There are 76 million Baby Boomers at present, consisting of people born between 1946-1964. They represent 25 percent of the US population.
Those born in 1946 will turn 65 in 2011 and become eligible for Medicare for the first time. Many will also begin retiring and subsequently collecting Social Security as well.
The Boomers will continue becoming eligible for both Medicare and Social Security in each of the subsequent 18 years, placing huge demands on both systems.
The shortfall will be so great that years ago our nation's chief accountant foresaw an impending disaster.
David Walker, the former US Comptroller General, urgently sounded the alarm to anyone who would listen; our nation is in deep fiscal trouble and no one is doing anything about it.
But Walker was ignored by the Bush Administration and Congress. He warned about our $53 trillion obligation for entitlements — with zero dollars set aside for them.
Ultimately, Walker quit in frustration in March of last year. No one in government was listening, or responding, to his urgent warnings and pleas.
The problem has only worsened since then. The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.
Clearly, our government has obligations that it will never be able to honor. That will be the bitter pill that all future retirees will have to swallow.
"The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon." — David M. Walker, former US Comptroller General