Let Them Go Bankrupt, Soon

When the trustees of Social Security and Medicare recently reported on the economic outlook for these programs, the news coverage was universally glum. The recession had made everything worse. Social Security, Medicare face insolvency sooner, headlined The Wall Street Journal. Actually, these reports were good news. Better would have been Social Security, Medicare risk bankruptcy in 2010.

It's increasingly obvious that Congress and the president (regardless of which party is in power) will deal with the political stink bomb of an aging society only if forced. And the most plausible means of compulsion would be for Social Security and Medicare to go bankrupt: trust funds run dry; promised benefits exceed dedicated payroll taxes. The sooner this happens, the better.

That the programs will ultimately go bankrupt is clear from the trustees' reports. On pages 201 and 202 of the Medicare report, you will find the conclusive arithmetic: over the next 75 years, Social Security and Medicare will cost an estimated $103.2 trillion, while dedicated taxes and premiums will total only $57.4 trillion. The gap is $45.8 trillion. (All figures are expressed in "present value," a fancy term for "today's dollars.")

The Medicare actuaries then dryly note what would happen once the trust funds for Social Security and Medicare's hospital insurance program are depleted: "No provision exists under current law to address the projected [Medicare] and [Social Security] financial imbalances. Once assets are exhausted, expenditures cannot be made except to the extent covered by ongoing tax receipts." Translation: benefits would fall. Social Security checks would shrink; some Medicare bills wouldn't be paid in full—and the shortfalls would progressively worsen. Retirees would scream. Hospitals might shut. No president or Congress would abide the outcry; even the threat of imminent bankruptcy would rouse them to action. But restoring the programs' solvency would confront Congress and the White House with fundamental questions.

In 1940, life expectancy at birth in the U.S. was 61.4 years for men, 65.7 for women; by 2008, the comparable figures were 75.4 and 80. So, as health and longevity improve, when should people stop working and be entitled (from which comes the noun "entitlement") to receive government retirement subsidies? Stripped of popular euphemisms ("social insurance," "entitlements"), that's what Social Security and Medicare mainly are. If that's so, how much should wealthier retirees be subsidized?

Or: how much should obligations to the old displace other national needs—for, say, defense, education, research, housing, transportation or adequate family incomes? In 1990, Medicare and Social Security represented 28 percent of federal spending; in 2019, their share will be almost 40 percent, projects the Obama administration. As this spending grows, pressures to raise taxes, increase budget deficits or cut other programs intensify. What's the right balance between the past and the future?

Or: how can the medical system be reorganized to improve care and restrain costs? By some estimates, 30 percent of health-care spending may be unneeded or ineffective.

Unfortunately, the Medicare and Social Security trust funds won't be exhausted until 2017 and 2037, respectively, by the latest projections. Although these bankruptcy dates are advanced from last year's estimates (2019 for Medicare and 2041 for Social Security), they're still fairly distant. Between now and then, the drain on the rest of government will occur invisibly. The inadequate trust funds will steadily diminish. The government bonds in these trust accounts will be presented to the Treas-ury for payment. Those payments can be financed in only three ways: bigger deficits, higher taxes or spending cuts.

But without a forcing event—something requiring a response—presidents and Congresses sidestep the underlying choices. They profess concern, but their proposals are cosmetic, ineffectual or both. "We must save Social Security for the 21st century," proclaimed Bill Clinton. "The system … on its current path is headed toward bankruptcy," warned George W. Bush. Now Barack Obama seems to be following suit.

"What we have done is kicked this can down the road," he told The Washington Post. "We are now at the end of the road and are not in a position to kick it any further." Great rhetoric—but that's all. Although no one expects Obama to have a grand blueprint after just four months, he has yet to signal even general support for needed policies: gradual increases in eligibility ages; gradual benefit reductions for wealthier retirees; a fundamental overhaul of Medicare. Indeed, Obama's plans to expand government-paid health insurance might increase Medicare spending by aggravating medical inflation.

Like General Motors and Chrysler, we continue self-defeating habits because we can—temporarily. These are not easy issues. But procrastination is a bad policy. The longer changes are postponed, the more wrenching they will be. The hurt for retirees and taxpayers alike will only grow with time. Social Security last faced a forcing event in 1983, when a dwindling trust fund prodded Congress to make changes. The counterintuitive lesson: a "crisis" is just what we need.

samuelson’s latest book is The Great Inflation and Its Aftermath: The Past and Future of American Affluence.

© 2009