The Looming Financial Disaster

Megan McArdle has a good piece in Tech Central Station on the looming crisis in Medicare and Social Security. This is a crisis that is coming far faster than anyone thinks:

I know it’s hard to get excited about the long-term solvency of Social Security, even if you are among the few Americans who has noticed that the Social Security and Medicare “trust funds” are slated to run dry sometime around 2040. After all, if you’re over fifty, you probably won’t live to see the day that the “trust” is exhausted. And if you’re under thirty, you probably have emotional trouble actually imagining yourself needing a walker and a pillbox full of heavily subsidized drugs. That leaves a very narrow band of our citizenry willing to spend precious time worrying about the solvency of our old age programs.

But if you are having difficulty keeping your mind focused on the problem, I think I can help: the problems won’t start in some comfortably far off time. They’ll start in less than ten years.

Indeed, even economist Alan Schick of the center-left Brookings Institution predicted that Medicare oulays will soar from $600 billion to nearly $4 trillion, and by 2050 spending on Social Security and Medicare will subsume 80% of the federal budget. (Alan Schick, The Federal Budget: Politics, Policy, and Process, Washington: The Brookings Institution. 2000. p. 274).

Clearly such a scenario would be disastrous to the financial health of the country. As McArdle puts it:

In other words, with or without the trust fund, when the expenses of Social Security and Medicare exceed the value of our contributions, our budget is suddenly going to have more holes than a warehouse full of Jarlsberg. And when does this happen? According to the Social Security trustees, Medicare’s expenses start to exceed benefits in 2013, less than ten years from now. Social Security follows suit in 2017. 2040 isn’t the date when we need to start worrying; it’s the date when we finally give up pretending that Social Security is anything other than a gigantic Ponzi scheme, and the suckers revolt….

And what are our elected officials doing about this looming crisis? Why, with the able assistance of groups like the AARP, they’re actively looking for ways to make it worse. Congress is currently labouring assiduously to increase our Medicare costs by $400 billion in the next decade with a new prescription drug benefit. Even if the new program manages to keep from going over budget — an event which the history of Medicare spending renders unlikely in the extreme — it will drastically advance the date when the hidden liabilities of our old age programs reveal themselves, with a vengeance.

It is clear that both parties are using Medicare as a way of capturing senior votes through expensive and largely unnecessary programs like a prescription-drug benefit. It is simply unacceptable to destroy the Medicare system in order to give a few seniors cheaper drugs. Those who really need cheap prescriptions could already get them through any number of specialized programs from the pharmaceutical industry. Instead the government did what it usually does, which is overreact and put short-term political gain over the long term health of the country.

If the Democrats (or the Republicans for that matter) were serious about reducing the deficit, they would demand a repeal of the $400 billion prescription drug benefit to Medicare. It is a policy that is unnecessary, expensive, and will balloon out of control. Furthermore, it only exacerbates the basic structural problems with Medicare and Medicaid that will lead to a budget-busting collapse in the next fifteen years.

However, with the AARP and other senior groups being exceptionally powerful in Washington, the chances of that happening are slim. Yet the reality of the system is unchanged – either we begin a process of fundamentally reforming the Social Security system by putting Social Security funds in a “lockbox” as was suggested by both candidates in the 2000 campaign, and allowing younger workers to invest portions of their income in private investment accounts, or we wait until the system reaches crisis proportions and any solution will require painful sacrfices to fix. Given the way Congress operates, it appears that the latter will be the more likely scenario.

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