September 16, 2014

CONCORD COALITION URGES LAWMAKERS TO PROPOSE SERIOUS SOLUTIONS FOR UNSUSTAINABLE ENTITLEMENT PROGRAMS

WASHINGTON -- With today's release of the annual Social Security and Medicare trustees' reports showing a combined long-term unfunded obligation of $72 trillion, The Concord Coalition warned that the two programs are on a fiscally unsustainable track and urged lawmakers to respond with serious solutions rather than free lunch plans or “do nothing” promises.

“This year's trustees' reports again demonstrate that Social Security and Medicare promise far more in future benefits than the current system can deliver. The need for change is a matter of arithmetic, not ideology. Some combination of reduced benefit promises and new funding is needed to make these programs fiscally sustainable and generationally equitable. There is no free lunch, and the longer we delay making hard choices the harsher the results will be for future generations,” said Concord Coalition Executive Director Robert L. Bixby.

“It is understandable that in this election year there will be a vigorous debate over the best way to deal with the fiscal challenges ahead. But the debate should be about realistic options, not about who can promise the most without asking anyone to give anything up. In effect, those who pledge not to consider any benefit reductions or new funding are pledging to stand by and watch as Social Security and Medicare go over a fiscal cliff,” Bixby said.

The most significant change in this year's report is the dramatic increase in the long-term cost of Medicare. With the addition of a prescription drug benefit, Medicare is now projected to more than triple as a share of the economy by 2040. In last year's report Medicare did not triple as a share of the economy until after 2060.

“The new Medicare projections underscore the extent to which short-sighted fiscal policies tend to ignore ballooning long-term costs. Arguing over whether the prescription drug benefit will cost $400 billion or $530 billion in the next 10 years diverts attention from the fact that Congress and the President have added a massive new obligation to a program that already had a serious long-term funding problem,” said Bixby.

In total, Medicare and Social Security are now projected to cost nearly 15 percent of GDP by 2040. To put that number in context, if we spent 15 percent of GDP on these two programs today they would consume 95 percent of all federal revenues.

According to the trustees, the present value of Social Security's unfunded obligations over the infinite horizon is $10.4 trillion. The unfunded obligations of Medicare total $61.6 trillion in present value. This consists of the obligations for the Hospital Insurance program ($21.8 trilllion), the Supplemental Insurance program ($23.2 trillion), and the new prescription drug program ($16.6 trillion).

The Concord Coalition welcomed the trustees' addition of unfunded obligation numbers for Medicare. Such calculations make sense for Social Security and Medicare because they involve promises spanning generations. While all such long-term projections are uncertain, Concord has consistently warned that the traditional method of reporting the outlook for Social Security and Medicare - trust fund solvency - greatly understates the programs' true burden on the budget, the economy, and future generations. Trust fund solvency is unrelated to the cost of future benefits or to the manner in which sufficient resources will be found to afford this cost.

Fiscally and economically, what matters is not the trust fund balance but the operating balance - that is, the annual difference between outlays and dedicated tax revenues. For example, in 2040 the Social Security trust fund is projected to be fully “solvent.” But in that year alone the program will need a general revenue infusion of about $360 billion in today's dollars to redeem its dwindling supply of Treasury bonds. That is more than was spent on the entire Medicare program in 2003. Closing the gap in 2042 upon trust fund bankruptcy will require a payroll tax hike of more than one-third or a benefit cut of 27 percent. These are the consequences of pursuing a “do nothing” strategy.

“These programs must not be viewed in isolation, either from each other or from the overall federal budget. The same bonds that are assets for Social Security and Medicare are liabilities for the Treasury. Once the cash flow turns negative, which has already happened for Medicare Part A and will happen in 2018 for Social Security, the Treasury must redeem the trust fund bonds by raising taxes, cutting other programs, or running up the public debt. Our focus must be on how much these programs are going to cost over the long-term and how future taxpayers are going to pay for them. Trust fund solvency does not address either of these key issues. It is simply a matter of government bookkeeping,” Bixby said.

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