If Paul Krugman's notion of accounting was workable, Enron would still be an operating company. The fundamental issue with Social Security and Medicare is that the unfunded liabilities are growing much faster than the economy or net worth of the country. Worse, this is not a passing problem. It's baked into our demographics for the next half century.
Social Security, however, is a relatively small part of the problem because its unfunded liabilities (the amount by which its promised payments exceed expected tax revenue) are about 1/8th of the unfunded liabilities of Medicare. As I pointed out in a column in late 2007, when Medicare Part D (the prescription drug plan) was passed its immediate unfunded liabilities, alone, exceeded the unfunded liabilities of Social Security. Here's a link to that column, with links to related sources:
http://assetbuilder.com/blogs/scott_burns/archive/2007/10/12/the-monster-that-ate-social-security.aspx
While the Social Security Commissioners annual letter routinely tells us that there will be a problem around 2042 when the Social Security trust fund runs out of assets, he is blithly assuming that the Trust fund will be able to redeem its collection of Treasury obligations at will. Here's the link to a 2006 column on what the financing of Social Security and Medicare looks like when you do a cash flow analysis that doesn't include the book entry interest on the trust fund:
http://assetbuilder.com/blogs/scott_burns/archive/2006/05/16/When-Worlds-Collide.aspx
You should note that these figures come from government estimates, not from a politically funded think tank or a single writer. Others are starting to take note, witness this recent column by Loeb Award winner Alan Sloan:
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/17/AR2008031702702.html
Go to this table in the most recent Trustees report:
http://www.ssa.gov/OACT/TR/TR07/VI_OASDHI_dollars.html#wp150920
and scroll down to table VI F9 which combines the cost of OASDI (Social Security) with Medicare (HI) excluding interest on the trust funds and you'll find that costs exceed tax revenue in either 2015 using the intermediate cost estimate or 2011 using the high cost estimate. Either way, that's not too far away.
In that year, the employment tax will no longer cover the cash expenses of the two programs. That's when Social Security and Medicare will start to compete with other government programs.
If we still have a deficit, that means we'll be asking Europe, China, and Japan to provide the (borrowed) cash that will support our senior citizens. All three are aging more rapidly than we are here in the U.S. It's not a pretty picture.
You should also know that estimates by the Trustees have tended to be optimistic. In 1983 the Greenspan Commission recommended changes that would put Social Security in balance for the next 75 years. The recommendations were put in place. Now, only 25 years later, the system has major unfunded liabilities again. Add his errors as Fed chairman and I don't think history will treat him very kindly, but that's another story.
Scott
