How Much Money Did Bush Take From Social Security

Collision course

The Bush budget and Social Security

past Max B. Sawicky

These long-run upkeep projections show clearly that the budget is on an unsustainable path, although the rise in the deficit unfolds gradually . . .

— Analytical Perspectives, Budget of the U.S. Government, Fiscal Year 2006, p. 208

Some in our country think that Social Security is a trust fund–in other words, at that place's a pile of money existence accumulated. That'southward simply simply non truthful. The money–payroll taxes going into the Social Security are spent. They're spent on benefits and they're spent on government programs. There is no trust. Nosotros're on the ultimate pay-as-you-go system–what goes in comes out. And so, starting in 2018, what's going in–what's coming out is greater than what's going in. It says we've got a problem [accent added]. And we'd better starting time dealing with it at present. The longer nosotros look, the harder it is to gear up the problem.

— President George W. Bush-league, Feb nine, 2005

The Bush Administration'south upkeep for financial twelvemonth 2006 proposes the continuation of fiscal policies that undermine the federal government's ability to perform traditional, basic functions, including its capacity to make skilful on obligations to Social Security and Medicare. Current retirees, as well as workers currently over the age of 55, are in danger of benefit cuts in coming years, despite the president'south assurances to those groups that their current benefits are safe.

This report examines the long-run budget moving-picture show as projected in the administration'southward latest upkeep documents, using their own short-term forecast for the sake of argument. These numbers show that the administration'due south upkeep policies make the problems worse, not better. In item, the information show that protection of Social Security and Medicare benefits is impossible nether Bush Assistants policies, only viable under an alternative budget framework.

The Bush Assistants's long-run budget scenario

Table ane shows that the deficit (listed in the table equally "unified budget deficit") in 2005 is projected at iii.five% of Gross domestic product.¹ In spite of promises to cut the deficit in half over the next 5 years, the administration's own data bear witness that a gap of roughly this magnitude will recur and persist over the next xx years under electric current Bush Assistants policies (Gale and Orszag 2004) . (For reasons discussed beneath, the projected debt and deficits in 2015 are understated, only they still point a threat posed by the Bush budget to those over age 55.)

Fifty-fifty when the analysis is confined to the administration's ain numbers, the data testify that by 2025 the deficit is back up to 2.7% of Gdp. Between 2025 and 2035, federal debt every bit a share of Gross domestic product jumps from 38%also its present levelto 59%, and the growth of debt continues to accelerate after 2035, moving well across plausible levels.

How large a deficit is manageable? A bones principle is that debt may increase at the same rate equally GDP without creating a trouble. Under such circumstances, the burden of the debt will not abound.² Currently, debt is 38% of Gdp. Rounding to 40% for ease of illustration, with the rate of nominal economic growth at v%, a sustainable deficit on average would exist roughly two% of GDP5% of 40%.

Larger deficits would imply debt growing faster than Gross domestic product and an increasing interest brunt on the federal budget. If this obligation were met with increased borrowing, the problem would worsen with each passing year. Previous analyses have shown that current tax and spending policies will cause the debt burden to increment sharply over the side by side 10 years (Cost and Sawicky 2004; Friedman, Carlitz, and Kamin 2005; Gale and Orszag 2004). For the sake of argument, this report begins by accepting the Bush Administration's claim that no such problem is in the offing. Withal, under the administration's own proposed budget and the long-run projections based on that budget, the longer-term fiscal state of affairs is still unsustainable, a fact acknowledged in the excerpt from their budget document at the showtime of this report.

Depleted revenues exacerbate budget problems

Revenues for 2005 are projected at 16.8% of the gross domestic product (GDP), a level typical of the 1950s but not seen once more until 2003. More important, if the president's proposals are enacted and remain in strength, projections show that federal receipts every bit a share of GDP will remain beneath their 2000 height for the next fifty years, until 2055.

The policy assumption underlying the acquirement projection is odd in the context of warnings about futurity deficits, since the policy choice to maintain tax cuts and forego revenues obviously helps to drive the loftier arrears outcome that President Bush-league warns against. The assistants'south zeal for tax limitation is reaffirmed in its latest proposal to cut taxes by an additional $one.iii trillion over the next x years.

Although the 50-year recovery of revenues is extremely protracted, this recovery is still a probable overstatement of what can reasonably be expected under current acquirement policies. The share of GDP devoted to federal revenue enhancement revenues is itself a political football. A determination to limit this share to twenty% or less is a normally voiced commitment of politicians in both parties. On this count solitary i could doubt the prospect of the revenue enhancement share of Gdp ascension, even at the moderate pace reflected in the administration's projections.

Spending trends worsen budget dilemma

While revenues are inordinately depression, full federal outlays as a share of GDP are now in line with their average of 20.7% of GDP from 1967 to 2005. In the future, however, this is expected to change. Table 1 shows upkeep projections through 2075. Diverse facets of the upkeep are examined below (in the order in which they appear in the table).

Discretionary spending. For the purposes of these projections, the administration assumes that discretionary spending drops from 7.9% to five.9% of Gdp over the next 10 years and remains a fixed share of Gross domestic product after 2015. Later on expenditures on the missions in Iraq and Afghanistan finish to be necessary, the implied "peacetime adjustment" could be about 1% of GDP, bringing the full to 6.ix%. A second percentage-betoken drop would bring discretionary spending to 5.9%. Maintaining a fixed share of GDP after 2015 implies that discretionary spending grows at the same rate as the economic system.

An adjustment of one-half a percentage of GDP to both defense force and non-defense discretionary spending, phased in over a decade, is plausible. Under such a mandate, some real growth in both categories of outlays would remain possible. Of class, alternative combinations are conceivable. Using 2005 as a benchmark, on the whole, discretionary spending shrinks relative to GDP over the flow in question. Because the share of Gross domestic product remains stock-still in the project subsequently 2015, this sector of the federal budget does not figure in the untenability of the budget projections as a whole.

Social Security. Expenses for Old Age, Survivors, and Disability Insurance (OASDI) are expected to grow as a share of Gdp by 2.2 percentage points over the adjacent 70 years. Most of the buildup1.8 percentage pointstakes place over the next forty years. The increasing number of retirees is not the only factor in Social Security cost growth. Projected increases in longevity will proceed to raise costs after the passing of thursday
e Baby Boom generation. However, the effect of these changes later on 2040 is small. In the ensuing xxx years, the further increment is but 0.4 percentage points of GDP.

Medicaid. Though ofttimes likened to Medicare, the increase in federal Medicaid outlays as a share of GDP for the unabridged flow is more than on par with that of Social Security1.8% of GDP past 2075. Withal, the equivalent share born past state and local governments should not exist glossed over; it would increase as well. Moreover, the federal share more doubles, from 1.5% of Gross domestic product in 2005 to three.three% in 2075. The Center on Budget and Policy Priorities reported in 2005 that "[In recent years] Medicaid costs take risen much more slowly than individual insurance costs . . . [and] Medicaid costs per person are essentially lower than those for private insurance . . ." (CBPP 2005).

"Other mandatory programs." This spending category falls significantly relative to Gdp, dropping nearly two pct points. It includes diverse programs such as Food Stamps, unemployment insurance, Supplemental Security Income, and federal employee retirement. The largest gene in the decline of other mandatory programs is the presumed downsizing of the federal workforce and the stagnation of certain grants to state and local governments in comparison to economic growth (CBO 2003).

The subtotal of all of the to a higher place spending items shows an overall change of 0.2% of GDP in 70 years (2005-75) (equally shown in the terminal column on the right). Taken as a grouping, these components of federal spending are stable. At the same time, the expansion of Medicaid is noteworthy.

Medicare. The latest budget documents project that Medicare spending will grow from 2.4% of GDP to 10.4% by 2075. Medicare spending is growing faster than Social Security, and it volition continue to practice so subsequently the passing of the Baby Blast generation. Price increases are driven by rise costs per beneficiary as well as the aging of the population, and technological innovations in diagnosis and treatment have been steadily raising resources employ per beneficiary over fourth dimension.

An important component of the Medicare price increase is the new prescription drug benefit. As many have noted, the long-term price of this benefit is much larger than the projected shortfall in Social Security. The 75-year cost of the drug benefit is estimated at $12.3 trillion, exceeding Social Security's 75-yr unfunded liability of $3.7 trillion (OMB 2005). Over the next 75 years, the drug benefit is estimated at ane.38% of Gross domestic product, more than twice the Social Security arrears of 0.65% of GDP (Boards of Trustees 2004a and 2004b, cited in Kogan and Greenstein 2005).

For the economy every bit a whole, health care spending growth is due to both the aging of the population and to increased health care spending per person. Of grade, no one favors restricting improvements in longevity, then the central policy questions are how much health care spending growth per person should be accommodated and how this spending will be paid for.

One method of gauging Medicare spending growth is comparing it to the growth of per capita GDP. The idea is that growth in full Gdp per capita is a reasonable point of reference from which to judge growth in Medicare spending per Medicare beneficiary. The demand for wellness care spending keeps pace with full general economic growth. Since Medicare beneficiaries are growing in number faster than total population, constant Medicare spending per casher would mean faster growth in Medicare than in GDP. The Bush Assistants'south projections follow the lead of the Medicare Trustees by assuming that Medicare spending per beneficiary grows i percentage betoken faster than GDP per person. This is the Trustees' "heart toll" scenario. The departure in annual growth rates between Medicare costs per beneficiary and Gdp per person is sometimes called the "excess cost rate" (CBO 2003).

The assumption of a 1 percentage-point growth increment is actually minor in calorie-free of recent history, during which the rate was closer to ii percentage points. An excess toll rate of one percent point yields a Medicare share of GDP in 2050 of 8.3%, somewhat greater than the OMB estimates in Table 1 (CBO 2003). It follows that reducing costs below those projected in the table will crave dropping the annual "excess toll rate" below 1%, a daunting undertaking. Policies to slow the increase of health intendance costs would apply to Medicaid also. For this reason, the Bush-league Administration'due south projections are optimistic, and they already reflect some likely reduction in Medicare and Medicaid spending growth relative to recent experience.

Parallel toll growth in private-sector health intendance demands the priority of comprehensive structural reform of the entire U.S. health care system. From 1960 to 2004, real Gross domestic product increased by 333%, while total inflation-adapted private-sector health intendance spending increased by 850%, raising the aforementioned question of sustainability every bit for Medicare and Medicaid (Heffler et al., 2005; CMS 2005).

The ability of any reform to improve upon the conservative estimates reported in Table 1 is open to incertitude. In any case, fifty-fifty if Medicare and Medicaid costs are shifted out of the public sector, social club every bit a whole volition not be able to escape these same costs. Insofar every bit public financing fails to defray medical expenses, the slack volition either be taken up by families or the "savings" will be realized by people foregoing care.

Full programme outlays (not including net interest). The long-term increase in plan spending is significantabout ten% of GDPand dominated by Medicare and Medicaid. To exist certain, such a dramatic increase in spending on these programs would marking a significant shift in the composition of total output in the U.Southward. economy toward wellness intendance, but such shifts are inappreciably without precedent.

From 1950 to the present, the share of consumption devoted to nutrient has declined from 28% to 14%, only nobody suspects a problem with the U.S. food supply. Similarly, the share devoted to habiliment and shoes declined by six percentage points, but clothing shortages and shoelessness are not on the agenda of national problems. On the other manus, the share of consumption devoted to services increased 26 percentage points, from 33% to 59%. Increased use of medical services (from 2.5% to eleven.9% of Gross domestic product) accounted for fully one-half of the overall increase in spending on services.

Effigy 1 shows total spending on wellness intendance as a share of Gdp, split according to public and private financing since 1965. Many of the aforementioned pressures propel increases in both public and private health care spending. Notation that private spending has increased quickly, despite the introduction of Medicaid and Medicare in the 1960s. It might as well be noted that overall spending was predicted to rise quickly in the 1990s, but it did non.

The claim of devoting an additional 8% of GDP to wellness care through public-sector payments over the side by side seventy years are grist for debate. However, even nether the cost projections of benefits currently provided, the implied total level of regime spending at the end of the period would remain below that of major European countries today. Many of those countries savour productivity growth on par with the United States, if non better.

Primary deficit. Row ten in Table 1 shows the "primary deficit," defined as the excess of spending on programs over receipts, excluding involvement payments. The rationale is that a master deficit of zerowhere borrowing is express to defraying involvement paymentscan exist sustained indefinitely. A minor only persistent primary arrears implies debt and interest growing more than rapidly than GDP, a condition that is unsustainable in the long run.

The Bush Assistants'southward understated deficit projections d
elay the onset of primary deficits until afterwards 2025. Thereafter, primary deficits cause mounting involvement and a desperate expansion of federal debt every bit a share of Gdp. But if revenues were raised to proceed footstep with program spending (row 1 matching row 8 in Table ane), federal debt (row 13) would remain flat as a share of Gdp instead of exploding.

Net interest. In the presence of sustained primary deficits, borrowing must comprehend increasing amounts of interest equally a share of Gross domestic product. This simply causes debt to compound at rates faster than economic growth. For this reason, interest outlays skyrocket in the projections, from 1.5% to 13.3% of GDP.

Unified budget deficit. It is primarily the combination of health care and net involvement that causes the overall arrears to increment to more than 18% of GDP. For the same reasons, debt as a share of Gdp explodes to 249% by 2075. Increased interest outlays of course effect from growing debt. Information technology is the failure to fund program expensesto match plan spending with revenuesthat accounts for this increase in deficits. In other words, the greater role of "runaway spending" in the projections, and the sole factor in the explosion of federal debt, results from primary deficitsthe gap between revenues and non-interest spending. A zero main deficit would proceed the debt-to-GDP ratio approximately fixed and limit the rate of growth of interest payments and federal debt to that of Gdp. (For stability, college or lower interest costs, respectively, would necessitate some primary surplus or let a express main deficit.)

The information in Table i illustrate some key points about the fiscal condition of the U.S. regime:

• Even if discretionary spending grows every bit speedily as GDP subsequently 2005, information technology is of little practical importance in the overall budget film.
• Taken together, all programs other than Medicarediscretionary, Social Security, Medicaid, and "other mandatory"are stable over the next 75 years, although Social Security and Medicaid increment significantly relative to their present size.
• The failure to match receipts to program expenses accounts for increased obligations in cyberspace interest payments, and hence more growth in deficits, than the other two major culprits combined: Medicare and Medicaid. Conversely, insofar as cost growth in health care goes forward, past choice or out of lack of success in restraining costs, the urgency of raising revenues to finance all program expenses and eliminate main deficits is magnified.

The problem is policy

How have the Bush Administration'south upkeep policies addressed these issues? At every turn, administration policies have exacerbated each of the problems enumerated here and documented in their own long-range budget projections. To summarize, the primary long-run upkeep problems are:

• Revenues. Standing the 2001-04 tax cuts that render Medicare and Social Security benefits, among other fundamental missions of the federal government, increasingly at run a risk for those currently and soon to be retired, equally well as for the disabled;
• Defense.Maintenance of debatable growth in defense spending;
• Health care. Creation of a new, massive, unfunded add-on to Medicare, and a failure to launch a serious inquiry into structural reform of the U.S. health intendance organisation;
• Deficits. Excessive deficit spending over the adjacent 10 years, giving rising to permanent increases in federal debt and interest payments.

Revenues. From its outset months in part, the Bush Assistants has repeatedly crafted tax cut proposals whose costs would be obscured in the public debate. For example, the current FY06 upkeep does not include the price of extending the most expensive provision of tax cuts begun in 2001the rate reductionsafter their scheduled expiration in 2011. Proposals for more than cuts are offered in the nowadays budget, despite predictable budget deficits.

The FY06 budget proposals reflect "back-loaded" tax cuts that provide illusory revenue increases in the brusque term. In detail, the assistants confines its budget projections to the next five years and estimates that new proposals for savings subsidies will bring acquirement gains of $fourteen billion over that menstruum. Those gains are more than wiped out in the subsequent five years, yielding a net loss of $15 billion for the entire 10-year period.

In aggregate, despite current deficits, and in spite of its own long-run deficit projections, the Bush Administration proposes to further reduce taxes by $1.3 trillion over the next 10 years. The resulting acquirement loss is expected to attain $two.one trillion through 2015; over 75 years, the loss in revenue will equal more three times the size of the long-term projected shortfall in Social Security as estimated the Trustees (Friedman, Carlitz, and Kamin 2005).

Defense force. After four years of defense force increasesall passed by Congress and approved by the presidentthe Bush upkeep proposes cuts in non-defense discretionary spending that are, in amass more than offset by increases in outlays for defense, international, and homeland security.

The practice of requesting resources in backlog of terrorism-related conflicts began before the invasion of Iraq, in spite of vastly diminished threats from the traditional adversaries Russian federation and China (Korb 2002). Korb diagnosed a failure of the Defense Department to eliminate programs that its new plans brand obsolete or superfluous, instead "layering" new systems on top of old.

The Bush Administration's budgets have not included the full costs of conflicts in Afghanistan and Iraq. These are presented every bit add-ons in requests for "supplemental appropriations" after the formal budget has been presented to Congress.

Health care. The Bush-league budget imposes its biggest cutting on Medicaid, implicitly shifting costs to land governments and once once again targeting a lesser cistron in long-term deficits. At the aforementioned time, the federal authorities is preparing to implement the next phase of the Bush Administration'due south massive, unfunded Medicare prescription drug benefit, now projected to cost $one.two trillion over the next 10 years (Connolly and Allen 2005).

Deficits. On March iv, 2005, the Congressional Budget Function (2005d) reported that "Over the 10-year period from 2006 through 2015, deficits would total $2.6 trillion under the President'south budget$1.6 trillion higher than [the] CBO's current baseline projection of the cumulative deficit." The CBO estimate means that nether the president's policies, total deficits over the period more than double the baseline level of $980 billion. Eighty-ix percent of the $ane.6 trillion increment is deemed for past $one.4 trillion in new tax cuts proposed in the upkeep.

Non included in this estimate is the president's Social Security reform proposal, which is estimated to incur nearly $iv.5 trillion of boosted borrowing over the first 20 years of performance, and trillions more in subsequent decades (Furman, Gale, and Orszag 2005). The Bush Assistants's estimates of "Plan ii" in the Economic Report of the President, 2004 (ERP) were based on the aforementioned size payroll tax "carve-out"four percentage pointsas the president has suggested this year. This would send four.0 out of 12.iv percent points of payroll taxation revenue into the individual retirement accounts (PRAs) advocated by the Bush-league Assistants. With the federal budget already in deficit, this money would accept to be replaced with new taxes, additional borrowing, or spending cuts. The ERP program opted for boosted borrowing and foresaw boosted federal debt accumulated under
this selection persisting for the next lx years.

In essence, the PRA diversion is a new revenue enhancement cut, albeit one of uncertain benefit to workers. For ane thing, the proceeds of the cut are unavailable to workers or their families until they retire, go disabled, or die. 2d, the future value of the tax cut depends on the worker'south success in investing; some workers will undoubtedly reap negative returnsthe offset to their do good could exceed the aggregating in their PRA. Tertiary, the administration'southward Social Security reform will link private accounts to benefit cuts, leaving the likelihood of a net proceeds for workers highly unlikely. The but certain thing about the payroll tax diversion is that it volition expand deficits in the near term and for some time to come. The extra layer of borrowing is not accounted for in the administration'southward budget or in its long-run projections.

Budget process reform. New budget procedure rules, proposed in the 2005 budget, are ostensibly aimed at securing fiscal discipline. In fact, they exacerbate the issues discussed in this report and magnify the threat to Social Security and Medicare (Kogan and Greenstein 2005).

The new budget rules would have the effect of masking the cost of tax cuts in budget reporting and inhibiting the practice of "pay as you go" in the realm of entitlements. Entitlement expansions would be disallowed without offsetting reductions in other entitlement programs, and the apply of tax increases to offset spending increases would exist prohibited.

While legislation to increment entitlement benefits would be blocked, the rules would non apply to spending under electric current police force, which the Bush-league budget documents have already admitted are unsustainable. In result, the Bush-league Assistants is giving a pass to its ain spending initiatives, which the budget document describes as unsustainable, while withdrawing spending opportunities to futurity elected officials. Tomorrow'southward political leaders are non probable to respect this dubious do in self-subject area.

The administration's proposed caps on entitlement spending are at cantankerous-purposes with its new Medicare drug benefit. In one form or another, the idea of entitlement caps has been fuel for budget proposals since the mid-1980s, but has never been enacted, much less implemented. The merits of any such entitlement caps are in doubt. Equally a applied affair, any cut in an entitlement requires a reorganization of the program, considering the stipulation of who is legally entitled to what benefit must change under pressure of any mandate for a spending reduction. In this respect, an entitlement cap defers the political burden for designing benefit cuts. It is non in and of itself an exercise of fiscal discipline.

The severest discipline in the budget rules proposed by the administration falls on discretionary spending in the form of spending caps. At the same fourth dimension, there are no obstacles to further taxation cuts. Moderate growth in discretionary spending is a non-factor in long-term budget difficulties, considering current discretionary spending as a share of Gross domestic product, both overall and in the separate categories of defence force and non-defense force, is under its historical average since 1962.

Effectiveness and merit aside, any one-sided arroyo to spending restraint is a capricious solution to budget deficits. There is no audio reason why any deficit must necessarily be reduced past resorting to a spending cut, rather than a revenue enhancement increase. The long-run projections discussed in the previous department are founded on the administration's own forecast for the next 10 years equally a "jumping off" point. Insofar as their projected deficits through 2015 are understated, estimated interest payments and deficits in the longer-term picture are biased in the aforementioned direction.

In curt, the president'due south proposals are more about arbitrary obstacles to federal spending than serious limits on deficits. The budget is already set on an unsustainable path. The bear on of the rules on spending restraint is outweighed by the implied opportunities for farther tax cuts.

The threat to Social Security

Given the current debate over the land of the Social Security programme, a major concern arising from the Bush-league Administration'due south proposed upkeep is whether the president'south policies endanger Social Security benefits in the about term. The statement at the offset of this paper from President Bush connotes a devaluation of federal obligations to the Social Security Trust Fund, and by extension, the future benefits of retirees, the disabled, and survivors. The post-obit is excerpted from the transcript of a background briefing on Social Security privatization given past a White Firm spokesperson:

SENIOR ADMINISTRATION OFFICIAL: Well, it'swell, actually, it'sI don't want to get off on too far of a tangent, just the Congressional Budget Office actually put out a newspaper this week which made a modification to what they had previously said nigh what current police was. And they made information technology very clear that current constabulary is really the level of benefits the current system can actually pay, as opposed to the level of benefits the current system is promising. So if you ask the question in terms of

Q: But they also said it can pay electric current level benefits until 2052correct?

SENIOR Administration OFFICIAL: But the Congressional Upkeep Office is besides very careful to say that starting in 2019 or 2020, the resources are not there to pay those benefits [emphasis added].

Washington Post, Feb ii, 2005

The projected cash deficit in the Social Security Trust Fund, defined equally the backlog of program expenses over revenue from dedicated taxes, is not without precedent. As shown in Figure 2, the plan endured greenbacks deficits from 1957 to 1964 and again from 1971 to 1983. The shortfalls in defended revenues did non prevent benefits from being paid as promised, and they need non in the future. In 1983 a commission appointed by President Reagan and bipartisan Congressional leadership, and led by Federal Reserve Chairman Alan Greenspan, crafted payroll taxation increases, among other measures, that were designed to restore 75-year actuarial balance.

Under the Trustees' 1983 projections, cash surpluses in the plan would persist until most 2020, followed past cash deficits through 2060. As far as the 2020 milestone is concerned, the 1983 projection has proven to be consistent with current estimates. In their 2004 report, the Trustees anticipated 2018 every bit the yr when cash deficits began, while more recently the Congressional Budget Function (2005c) projected 2020. The pattern of Trust Fund surpluses followed past cash deficits for the programme was fully foreseen. The aim of the 1983 understanding on program balances was to achieve a small surplus over the entire 75-yr period. Information technology was understood that greenbacks surpluses in the earlier years would be balanced subsequently by deficits. In that location is no precedent for admittedly barring cash deficits in the program, given the historic commitment to long-run, 75-year balance.

As anticipated in 1983, the Social Security Trust Fund presently runs a cash surplus, and interest credited to the bonds in the Trust Fund requires no cash resources. After 2008, the cash surplus volition begin to dwindle. Past 2018 information technology will disappear, and some of the involvement credited to the Trust Fund volition have to be rendered in cash.

Because the greenbacks surpluses transferred to the federal regime in substitution for bonds are spent, the point where those funds begin to diminish in 2009 is the indicate where the federal government will require budget savings elsewhere to account for the shrinkage in cyberspace revenues dedicated to Social Security. According to the Trustees (2004), in the turning point twelvemonth of 2009 the greenbacks surplus falls from its prior year's level of $108 billion to $1
04 billion. So the unsaid elevate on the non-Social Security budget begins in 2009, non 2018 or 2042. Hence, failure to exercise intelligent fiscal discipline has implications for pressures on the remainder of the upkeep in the next 4 years.

Given the trends in non-Social Security upkeep deficits, boosted debt accumulated between now and 2018 will necessitate the dedication of increasing cash revenues to interest payments. In this sense, future pressure to calibration back spending on the elderly is being locked in by today's myopic fiscal policies. That force per unit area would exist intensified by added borrowing to replace federal revenues lost to the private accounts under the Bush Administration's plan for Social Security reform.

The administration has made much of the future cash shortfalls in the Social Security programme. Simply in 2018, the Social Security Trust Fund is projected to have most $four trillion in assets (Board of Trustees 2004). Tabular array one shows that, under the optimistic projections to 2025 and across, the overall budget runs primary deficits. At that betoken, a sustainable financial policy would foreclose carrying the entirety of projected programme expenses, fifty-fifty if interest outlays are defrayed entirely by borrowing. A commitment to a balanced budget would dramatically compound the trouble. In either instance, a refusal to consider tax increases imperils all programs. Social Security benefits would not be shielded from danger if the federal authorities considers Trust Fund assets zero and void, equally the statement by the "senior administration official" at the offset of this section suggests.

A focus on the shortfalls projected after 2042 glosses over the firsthand upkeep situation while fabricating a future budget crisis. Figure 3 shows the projected costs and cash receipts to Social Security over the next 75 years. The nighttime region on the bottom reflects revenues defended to the Trust Fund, primarily payroll taxes, and the top boundary reflects total programme expenses. The grayness region reflects the menstruation during which Trust Fund assets by police are redeemed with full general revenues, primarily income taxes. The white region refers to the shortfall after Trust Fund avails are exhausted.

How much of a burden on general revenue is based on honoring debts to the Social Security Trust Fund? In 2018, the required cash transfer is $23 billion, or i-10th of a pct of Gross domestic product. The Social Security Trust Fund cash deficit does not reach i% of Gdp$326 billionuntil 2026, and hits 2% of GDP in 2070 (Trustees 2004).

If general revenue transfers to the Trust Fund connected at the aforementioned pace after 2042 as prior to that year, the overall burden of the program on the remainder of the budget would be unchanged. At that place is no economic stupor to the system after 2042 if support for currently scheduled benefits continues as earlier. From an economic standpoint, 2042 is a non-event. As far equally Social Security is concerned, the revenue problem is with us today and always, not in v, 15, or 40 years. The trouble of supplementing payroll taxation revenues to pay currently scheduled Social Security benefits is no different than the problem of financing everything else in the federal upkeep, including the current cash shortfall in the Medicare Trust Fund.

Medicare funding mirrors that of Social Security

The current non-crisis situation of the Medicare program provides a glimpse of the future course of Social Security. Medicare's Hospital Insurance (Hello) fund, devoted to "hospital, home wellness, skilled nursing facility, and hospice care for the aged and disabled," is financed with dedicated payroll taxes equal to 2.9% of full payroll, dissever equally between worker and employer. In 2003 the How-do-you-do fund had assets equal to 152% of fund expenses (Trustees 2004b). At the aforementioned time, the HI fund ran a greenbacks deficit identical in form to that projected for Social Security after 2018. Hence, it is currently financed in function by general revenues that redeem Trust Fund bonds disparaged as "mere IOUs" by conservative critics of Social Security.

As with Social Security, cash deficits in the HI fund have aplenty precedent. Figure four shows the background of greenbacks shortfalls redeemed by general revenue since 1973 in the Medicare/HI trust fund. By design, the Supplementary Medical Insurance (SMI) component of Medicare, which includes the new prescription drug do good, has e'er relied partly on general acquirement for its financing.

Given their present or imminent dependence on general revenue, both Social Security and Medicare are immediately vulnerable to pressures on the federal upkeep equally a whole stemming from a shrunken revenue system. By the same token, shortfalls of dedicated payroll revenue enhancement revenues in the past have not presented either program with a crisis. There need non exist a problem with providing the benefits promised under Medicare or Social Security if sustainable policies are implemented for the entire federal budget. For both programs, it is the historically unprecedented income revenue enhancement cuts in particular that direct threaten the expected benefits upon which current and imminent retirees will depend.

Death or taxes

The implication of much fiscal policy advocacy, both conservative and liberal, is that future deficit issues result from irresistible, external forces, in the form of anachronistic social insurance programs whose costs blow up over uncontrollable demographic trends. To the opposite, projected medium-term deficits stem largely from inordinately low revenues and failure to rein in defense spending. Deficits anticipated in the upcoming fiscal year and those immediately after lock in additional costs for interest on the expanding federal debt. General acquirement shortfalls put pressure on Medicare, Medicaid, and Social Security benefits, specially insofar as politicians agitate for default on federal authorities obligations to the Trust Funds by describing every bit worthless the bonds reflecting historic payroll tax contributions to these programs.

Of grade, in the narrow sense, other program spending underlies deficits in the same way every bit revenues. The rational question is, what sort of spending is meliorate left unspent? Discretionary spending generally tracks with economic growth and is below its historic average. Mandatory spending outside of Medicare, Medicaid, and Social Security is expected to refuse relative to Gross domestic product. Why indulge faster growth in the latter programs?

The nearly obvious answer is in the aging of the population. It is perfectly natural for consumption by elderly to increment equally their numbers do. For two-thirds of retirees, Social Security benefits account for more than half of their income. Medical care needs increase with age likewise.

A second key, underlying trend is the shift in consumption from appurtenances to services. Since 1950, 26% of consumption spending has shifted from goods to services. This reflects changes in productivity, prices, consumer demand, and other factors. The price of manufactured goods falls over time, leaving more income to spend on services. While medical services take led the way in price increases, prices in other categories of services, such as housing, electricity and gas, transportation, and recreation, have also increased faster than boilerplate goods prices.

Federal, state, and local governments in the United States typically do not produce goods. The focus of public spending outside of income support is on services, and particularly on health care. Basic economic forces take had a disparate effect on federal authorities budgets and volition do then increasingly in the future.

The remaining question goes dorsum to increasing health care spending per beneficiary unde
r Medicare and Medicaid. How much savings tin can be wrung out of the wellness care systemmore service for the same or less cost? Alternatively, if costs do not subtract, what future advances in medicine, if whatever, should be denied to the elderly and to others without the financial wherewithal to pay for the care they demand? Insofar as such savings and fiscal restraint may be accomplished, the long-run increases in program spending may be arrested.

If, every bit a society, nosotros do not want to drastically reduce the scheduled benefits of programs such as Social Security, Medicare, and Medicaid upon which the elderly volition depend, nosotros must determine the all-time way to broaden revenues sufficiently to keep pace with program spending. Otherwise, under the acquirement scenario depicted in the Bush Administration's upkeep analysis, substantial benefit cuts will be inescapable.

Deficit increases are entirely a different matter and are a question of whether the federal regime is fiscally responsible enough to finance the spending it undertakes, or fails to reduce. The decision to contract or aggrandize health care spending, properly speaking, has nothing to do with budget deficits. At that place can exist as much or every bit niggling public financing of health care spending every bit nosotros the people choose, naturally with some implied reduction in other goods and services.

The assumptions underlying plan spending in the Bush upkeep'south long-term projections (as shown before in Table one) are bourgeois, particularly in the near sensitive areahealth care. Bodily spending is likely to grow more rapidly. Under any scenario, general revenue volition exist needed to finance debts to the Social Security Trust Fund. As per its original legislation, also as under the new drug benefit, Medicare has e'er been partly financed by general revenue, and its costs will grow.

After 2018, restoring revenues to their pre-2001 levels volition probably not be sufficient to preserve the basic income and health intendance benefits upon which Americans depend. From a fiscal yr 2000 tax share of GDP of roughly 20%, later on 2025 the odds are that a gradual expansion to 30% of GDP over the ensuing 50 years volition be required. The only alternative to tax increases is to shift the costs and risks of retirement, inability, and health care to individuals (the very situation Social Security was created to counteract).

Conclusion

The political obstacles to a historic shift in the level of federal taxes must be weighed against the political implausibility of draconian cuts in Social Security and Medicare. The latter means denial of health care innovations to those who cannot afford to pay for the latest drugs, technology, and medical specialists out of their own pockets.

At that place is no firsthand crisis, but the longer it takes for revenues to exist restored to their late 1990s levels, the more difficult subsequent choices will eventually become. In the interim, growing debt volition cause interest payment obligations to automatically claim an increased share of monetary resources.

At a minimum, revenues ought to be chop-chop restored to something close to their levels in fiscal year 2001. The requirements for boosted resources may be large, but they are also uncertain, and they are spread over five decades. Futurity generations will accept the final say.

The likelihood remains that a standing failure to forgo tax increases, defense spending restraint, and comprehensive, structural wellness intendance reform moves the Bush Administration's own projection of an unsustainable fiscal policy from the realm of prophecy to that of certainty.

March 2005

Endnotes

1. Table ane is based on Table 13-2 in the Belittling Perspectives volumes of the upkeep for fiscal years 2004 and 2005.

2. Information technology is conventional in this context to assume the boilerplate cost of federal borrowing approximates the rate of GDP growth.

References

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Boards of Trustees. 2004b. Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. The 2004 Annual Study of the Federal Infirmary Insurance and Federal Supplementary Medical Insurance Trust Funds.

Centers for Medicare and Medicaid Services (CMS). 2005. < http://www.cms.hhs.gov/statistics/nhe/historical/highlights.asp>

Center on Upkeep and Policy Priorities (CBPP). 2005. "Hereafter Medicaid growth is non due to flaws in the programme'due south pattern, but to demographic trends and general increases in health care costs." February 4.

Congressional Budget Office. 2003. The Long-Term Budget Outlook. December.

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Friedman, Joel, Ruth Carlitz, and David Kamin. 2005. "Extending the tax cuts would cost $2.1 trillion through 2015." Center on Budget and Policy Priorities, Feb two.

Furman, Jason, William One thousand. Gale, and Peter R. Orszag. 2005. Should the budget exclude the cost of private accounts? Taxation Notes. pp. 477-87, January 24.

Gale, William, and Peter Orszag. 2004. The U.S. budget deficit: On an unsustainable path. New Economy. December.

Heffler, Stephen, Sheila Smith, Sean Keehan, Christine Borger, M. Kent Clemens, and Christopher Truffer. 2005. U.S. health spending projections for 2004-2014. Wellness Affairs. Feb.

Kogan, Richard, and Robert Greenstein. 2005. "Administration proposals to modify budget process have stiff ideological cast: Proposals would skew policy debates, exempt taxation cuts from fiscal discipline." Heart on Budget and Policy Priorities, February 9.

Kogan, Richard, and Robert Greenstein. 2005. "President portrays Social Security shortfall as enormous, merely his taxation cuts and drug benefit will toll at least five times as much." Center on Upkeep and Policy Priorities, February xi.

Korb, Lawrence J. 2002. Prepared testimony before Committee on the Budget, U.S. House of Representatives. February 12.

Function of Direction and Budget. 2004. Belittling Perspectives, Budget of the U.S. Government, Financial Year 2005.

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Role of the Press Secretary, White House. 2005. "President participates in form-action lawsuit reform conversation." Feb ix.

Toll, Lee and Max B. Sawicky. 2004. The Budget Arithmetic Exam. Economical Policy Institute Briefing Paper No. 153. Washington, D.C.: EPI.

Parrott, Sharon, Isaac Shapiro, David Kamin, and Ruth Carlitz. 2005. "Unpublished
administration upkeep documents show domestic cuts would significantly reduce funding for most public services." Heart on Upkeep and Policy Priorities, February 9.

Senate Budget Commission, Democratic Staff. 2005. "Brief analysis: President Bush'south FY 2006 budget." U.S. Senate, February viii.

Washington Postal service. 2004. White Firm Social Security briefing. February 2. < http://world wide web.washingtonpost.com/wp-dyn/manufactures/A59045-2005Feb2_3.html>

Source: https://www.epi.org/publication/bp156/

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