For The Real Condition of Social Security and Medicare, Turn to Appendix F
May 04, 2012

For The Real Condition of Social Security and Medicare, Turn to Appendix F

The Real Doomsday: Less Bang, More Whimper

Can you spell i-c-e-b-e-r-g?

Well, we’ve hit one and our ship is taking on water.

Two weeks ago the Trustees for Medicare released their annual report. The report, and the warnings it contained about the uncertainty of future costs, got some attention. But not nearly enough.

According to the report, the Medicare trust fund would be exhausted by 2024, only 12 years from now, under current law. Ditto the Social Security Trust fund. It will be broke by 2033, 21 years from now. When the Social Security trust fund is broke benefits will need to be cut by 25 percent. This, by the way, is the best-case scenario. As they did last year and the year before, the Medicare trustees express significant doubt that projected savings under current law will be realized.

Unfortunately, an event that appears to be more than a decade away doesn’t seem like an oncoming iceberg to those in Congress. For them it is many elections away. So the report disappeared as quickly as a bad movie.

But if anyone had read beyond the headline numbers, they would have learned that the Medicare and Social Security iceberg isn’t distant. It has already been struck.

The figures to prove it are in the same report.

Every year since 2004 devoted readers of the trustees report have found a section that explains how Social Security and Medicare trust accounting can be reconciled with the federal budget. This year it is Appendix F: “Medicare and Social Security Trust Funds and the Federal Budget.” It begins on page 234. You don’t need to be a CPA to understand this stuff. It clearly explains how the Trust funds relate to actual federal finance. It clearly shows what the politicians like to talk about— the trust funds. It also shows the actual cash flows we need to be worried about.

The feel-good story is that both Medicare and Social Security have reassuring trust funds that hold billions in Treasury obligations. The trust funds and the dedicated tax revenue that goes into the trust funds insulates them from the vulnerability that programs entirely supported by general revenues can experience. So if you are a senior on Social Security and Medicare, you are less vulnerable than most people who depend on federal spending.

But Appendix F tells us that Social Security and Medicare are becoming more dependent on general revenues at an alarming rate— to the tune of $402.7 billion last year. Last year is not 21 years in the future.

After years of surplus tax payments (mostly Social Security) that more than covered benefits, these programs now cost more than they receive in dedicated revenue. As a result, the surplus that allowed Democrats to do the spending they love—and Republicans to do the tax cutting they adore— is gone. Today, benefit payments are competing directly with other government commitments.

As I have pointed out in other columns, as long as the benefit costs of Medicare and Social Security were less than the taxes collected, things were fine. But the net cash cost of Medicare and Social Security— the amount by which benefit payments exceed dedicated tax collections— has nearly quadrupled since the last Presidential election, rising from $108.7 billion to $402.7 billion. Since our total deficit is about three times that $402.7 billion figure, it is reasonable to say that our two largest government programs are now directly responsible for about a third of current government borrowing.

This gigantic shift has already happened. It is history, not projection. As recently as two Presidential elections ago the cash cost of Social Security and Medicare was practically nothing— a mere $41.1 billion.

Here is how Trust surpluses compared with the actual cash cost in the federal budget:

icebearg graphic


The reported surplus of the trusts, mostly credited interest on their holdings of Treasury securities, show a happy number. Politicians of both parties use these figures routinely. The actual cash impact is virtually never mentioned.

The iceberg isn’t on the horizon. We’ve already hit it. Both parties should answer for it.


Want to learn more about how our government accounts for Social Security and Medicare?

Scott Burns, “The Big Double Whammy,” 7/09/2011

This column discusses the appendices explaining the difference between trust accounting and cash accounting for federal finance.

Scott Burns, “Making Things Right,” 2/18/2011

This column calculates how much extra a typical work has paid in taxes to support the Social Security and Medicare surpluses that Congress has spent and replaced with Treasury IOUs.

Scott burns, “Future Medicare: Cheap, But Not Available,” 8/13/2010

This column discusses how Richard Foster, the chief actuary for Medicare, has written a disclaimer saying that the Medicare expense reductions required by law were highly unlikely. So Medicare didn’t lose $15 trillion in unfunded liabilities simply because members of Congress voted for thousands of pages they never read.

Scott Burns, “Representation Without Taxation,” 8/07/2009

This column examines the growth of unfunded liabilities for Social Security and Medicare between 2004 and 2009 and compares them to both public federal debt and consumer net worth

Scott Burns, “Government, The Big Magician,” 11/16/2007

This column shows how federal deficits appeared to be smaller than they really were by comparing growth in federal debt to the magically smaller federal deficit. The difference, for the most part, was book entry crediting of interest to the entitlement trust funds.

Scott Burns, “This Year, a $3 Trillion Lump Under the Rug, 5/14/2006

This column compares the increase in Social Security and Medicare unfunded liabilities with a much smaller number, the increase in federal debt.

Scott Burns, “The Overlooked $2.3 Trillion Deficit,” 6/05/2005

“Let me be circumspect:,” this column begins, “government accounting is vile garbage.” Examining the unfunded liabilities of Social Security and Medicare over both 75 years and the more realistic, but far larger, “infinite horizon.&rdquo

If you would like to read more on this vexing subject, read “The Clash of Generations,” now available on Amazon where it recently ranked in the top 10 books in Finance, Economic Conditions, or Popular Economics.

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