Debt Ceiling Debate: Entitlements

Little doubt the upcoming fight to authorize more government debt will link raising the debt ceiling limit to entitlement reform.

It will come despite any short-term patch fix or President Obama’s inaugural address pronouncement.

Should Social Security and Medicare be in a debt ceiling debate? Are they fiscally stable?

To find out, the place to start is with the Social Security 2012 Trustees Report.

Are Social Security and Medicare Broke?

Social Security entitlements cost more than half the federal government’s current income and, when including deficit spending, is about 40% of the total federal budget.

The annual Trustees report of expenditures covers 4 separate entitlement funds:

  • Old Age pensions and Survivor’s Insurance (OASI) fund
  • Social Security Disability Insurance (DI) fund
  • Medicare Hospitalization Insurance (HI) fund
  • Supplemental Medicare Insurance (SMI) fund (physician services and prescription drugs)

Chart 1 – 2011 Social Security and Medicare Assets (Source: 2012 Trustees Report)

The most recent 2012 report compares the 4 programs as of the end of 2010 and 2011.

It may surprise some to learn that the old-age pension fund (OASI) grew by +$95 billion in 2011!

None of the 4 programs are broke… yet. They had positive balances at the end of 2011.

Also, it is not true, as some argue that the Social Security and Medicare trusts are already broke because, by law, their revenues must be used to purchase government treasury securities which are then, in turn, instantly spent to finance government’s growing debt.

As long as the “full faith and credit” of the United States remains meaningful then non-transferable interest bearing U.S. Treasuries will stay viable and the trust funds are real.

However, that is where the good news ends. The funds have deep seated fiscal troubles that are getting progressively worse.

Follow the Money

Chart 2 – 2011 Social Security and Medicare income (Source: 2012 Trustees Report)

More is learned by looking at Social Security entitlement program funding sources. The $95 billion surplus in the OASI fund in 2011, for example, comes with a great big asterisk.

OASI 2011 expenditure costs were $603.8 billion. It’s two main funding sources were $482.4B from payroll taxes and $106.5B from interest earnings. Those are self-supporting income sources.

$87.8B, however, came from six general fund reimbursements. The reasons for the reimbursements doesn’t matter. What matters is that cost is unfunded and comes out of general income tax revenues.

OASI isn’t as self-supporting as it appears to be!

Another $22.2B comes from taxing Social Security benefits. That is like a salesman promising you a discounted price on a purchase, but making up for it by piling on “fees” to make up the difference.

The bottom line is… OASI came up -$14.9B short of being self-sufficient in 2011! The $95B surplus came  from general fund reimbursements and by charging for the benefits.

OASI is not in good shape, but in far better shape than the other trust funds. They get really ugly!

Downside Indicators

Chart 1 above shows that both the Social Security disability fund (DI) and the Medicare hospitalization (HI) fund lost money in 2011. DI lost 15% of its value in 2011; Medicare hospitalization lost 10% of its.

Both programs will continue to drain each year until all their funds are gone. On the other hand, trustees’ say OASI will grow until 2020 before it, too, drains. Interest earnings will keep it afloat.

The trustees project that DI will exhaust its funds by 2016, two years sooner than last year’s projection. The disability fund is in critical condition!!

The Medicare Hospitalization fund is projected to be empty by 2024.

SMI, though, is in the worst shape of all. It doesn’t have a trust fund.

SMI pays for Medicare Part C and Part D. Part C pays doctor and outpatient services. Medicare Part D pays for the prescription drug program. Together they are the second largest entitlement cost.

SMI is very different from the others. 71% of its funding comes out of the general fund. It does not have a dedicated primary funding source! A “benefit premium” paid by individual users takes care of the rest.

SMI has the least stable funding, yet has the fastest growing costs. Prescription drugs alone have a larger unfunded liability than OASI.

An Aside: Payroll Tax Holiday Effect

The payroll tax holiday further weakened the long-term stability of the Social Security old-age pension fund (OASI). Congress didn’t provide any replacement funding.

According to the actuary report, the payroll tax holiday cost OASI $103B in 2011 and an estimated $113B in 2012. That lost income has a cascading effect over time. In 2012 alone, it reduced the time it will take to bankrupt OASI by three years!!

If not for the tax holiday, OASI would have had a healthy short-term income surplus of  +$88 billion even without the the general fund reimbursements or charging for benefits!

Reducing taxes is a tried and true method for stimulating an economy. Taxpayers, though, might justifiably question the wisdom of reducing payroll taxes instead of reducing income taxes.

Both methods work the same and either is as easily chosen to accomplish the same goal. An income tax reduction spreads the burden across the entire federal budget. A payroll “holiday” just shortchanges the national retirement plan.

Which would you chose?

Conclusions

The Trustees report says that even with the payroll tax holiday that OASI – the old-age pension fund – is in good short-term fiscal shape.

However, the Trustees shortened the time until the fund runs out of money by three years. It is now projected to run out of money by 2033.

The other three entitlement programs are in much worse shape..

According to the Trustees, the disability fund satisfies neither the long-range test nor the short-range test. DI costs have exceeded non-interest income since 2005, and the Trustees project trust fund exhaustion in 2016, two years earlier than projected last year.

DI is in critical condition!! It’ll run out of money by the end of President Obama’s second term.

SMI, the fastest growing entitlement, doesn’t even have a trust fund with stable funding right now.

Combined the OASI and DI programs continue to fail the long-range test of close actuarial balance. It does satisfy the test for short-range financial adequacy.

Ironically, the amount spent on the 4 entitlement programs is about the same as federal deficit.

The 2012 Trustees Report came out in March of 2012. The next one is due in the next couple months. It is sure to paint a bleaker picture.

Should entitlement spending be a part of any debt ceiling debate? ABSOLUTELY!

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About azleader

Learning to see life more clearly... one image at a time!

Posted on Jan 22, 2013, in Business, economics, Economy, Government, Medicaid, Medicare, news, Politics, Social Security, Taxes. Bookmark the permalink. Leave a comment.

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