January 05, 2005,
President Bush has declared that Social Security reform is his principal domestic priority this year. Press reports indicate that the White House has persuaded private groups to spend millions of dollars promoting its plan, even though we have yet to hear any of the specifics.
It is not clear what is driving the urgency of Social Security reform. It is desirable, to be sure, but nothing will happen to anyoneís benefit for some time to come. By contrast, the Medicare system is on the verge of collapse, according to a new government report.
The Financial Report of the United States Government for fiscal year 2004, released just before Christmas, says that the unfunded liability of the Social Security system is $12.5 trillion, an increase of $810 billion over the previous year. However, the Medicare deficit is twice as large: $24.6 trillion, an increase of $9.6 trillion from 2003.
In other words, in just a single year, the unfunded liability of Medicare increased by three-fourths of Social Securityís total deficit. Yet instead of talking about reforming Medicare, which is hemorrhaging money, we are talking only about Social Security, which is in sterling financial shape by comparison.
Indeed, not only are we not talking about reigning in Medicareís exploding costs, we are getting ready to make them much worse. Next year, the new Medicare drug benefit becomes fully effective. This will sharply increase Medicare spending. This is the reason for the increase in its unfunded liabilities. Medicareís trustees estimate the long-term cost of the drug benefit at $8.1 trillion, accounting for the bulk of the increase in its liabilities last year.
Another important difference between Social Security and Medicare is that the formerís costs grow very predictably, whereas the latterís can only be guessed at because they are rising so fast. Consequently, we can formulate policies to deal with Social Securityís long-term problems relatively easily. But we havenít even begun to think seriously about how to ration medical care, which necessarily must happen at some point.
For example, we could change Social Securityís indexing formula and eliminate almost all of its long-term deficit. This would not reduce the benefits of a single person current or future below that which exists today. All it would do is eliminate future real benefit increases over and above inflation.
According to the Social Security actuaries, someone with average lifetime earnings who retired at age 65 last year got $14,209 in benefits. This year, that same person will get $14,384 (in 2004 dollars), which results from the fact that initial benefits are indexed to wages that generally rise faster than prices. (This has nothing to do with the indexing of benefits after people begin drawing them. It has only to do with determining benefit levels when they are first drawn.)
Unless the indexing formula is changed, real benefits will rise indefinitely. For someone with average lifetime earnings, retiring at 65, Social Security benefits (in 2004 dollars) will reach $15,772 in 2025 and continue rising to $28,421 in 2080. The only reason that this increase isnít greater is that the normal retirement age is going up to age 67 for those retiring after 2025. Someone retiring at this age in 2080 would get real benefits (in 2004 dollars) of $32,795 per year.
Estimates show that just keeping real benefits unchanged they would still be indexed for inflation would allow Social Security benefits to be paid forever with no increase in tax rates. Future retirees will get exactly what current retirees get in inflation-adjusted terms. They just wonít get more, as they will under current law.
If I were a Democrat, I would support this reform and thus get the whole issue of Social Securityís solvency off the table. This would force Republicans to justify private accounts on their own terms, rather than as a cure for Social Securityís long-term deficit. If Republicans donít go along, it would prove that they arenít interested in saving Social Security, but instead have another agenda.
With Social Security secure in its present form, Democrats could then turn their attention to Medicare, which only they can fix. Republicans fear that any effort they make to reduce the growth of Medicare would too easily be demagogued as a benefit cut, so they wonít do it. Therefore, Democrats will have to take the initiative to get control of Medicare and put it on a sound long-term footing.
The Financial Reportís introduction by David Walker, comptroller general of the United States, makes clear that our long-term budget trends are unsustainable and will cripple the economy, threaten national security, and reduce the quality of life for all Americans unless addressed. The political party that steps up to this challenge will be the one that deserves to govern.