June 16, 2003
Collapse feared for Medicare, Social Security
Aging population, deficit don't allow for easy solutions
By FINLAY LEWIS
COPLEY NEWS SERVICE
WASHINGTON – Medicare and Social Security are speeding toward a fiscal train wreck because the United States is graying and the federal deficit is exploding.
Medicare could be insolvent by 2026 and Social Security by 2038. Now add to that the likelihood of an expensive Medicare prescription drug benefit wending its way through Congress.
Because the government borrows so heavily from the large surpluses that currently exist in those programs, the damage could be far more widespread.
And the choices for dealing with a potential fiscal free fall – enormous tax increases, deep spending cuts or massive government borrowing – also could be damaging.
"There is no free lunch," Douglas Holtz-Eakin, director of the nonpartisan Congressional Budget Office, told Congress. "Effective measures will not necessarily be popular measures, and the longer they are deferred, the harder they will be to enact, as those affected grow as a share of the population."
The situation comes as no surprise to the nation's politicians, who are just now coming to grips with a long-standing demand by the elderly for greater help in paying for prescription drugs.
Regardless of what Congress does on prescription drugs, Medicare's long-term financial problems will persist. Without an immediate crisis, lawmakers feel little urgency to seriously tackle the problem because any realistic solution almost certainly would anger older voters.
And solutions are likely to be harder to find with each passing year.
The Congressional Budget Office recently estimated that the federal deficit will be about $400 billion by Sept. 30. That is equal to about 4 percent of the nation's annual production of goods and services, and represents a significant turnaround from the surpluses of a few years ago.
Social Security and a key part of Medicare draw their funds from payroll taxes levied against the current work force and its employers.
When the post-World War II baby-boom generation began entering the work force, the system worked beautifully. With fertility rates climbing through the 1940s and 1950s, Social Security – a New Deal landmark – experienced huge surpluses in its trust fund because of a favorable ratio of workers to retirees.
Medicare, enacted in 1965, benefited from the same trends.
By the mid-1970s, the fertility rate fell below pre-World War II levels and has remained low. That fact now is about to intersect with the impending retirements of older members of the baby-boom generation.
By 1990, there were five employed Americans for every person over 65. Today's worker-to-retiree ratio of 3.7-to-1 is due to fall to 2.4-to-1 by 2030. By 2075, there are projected to be two workers for each retiree.
Even that statistic understates the looming problem.
Those now approaching retirement are expected to live far longer and make greater demands on a health care system that is growing pricier by the day.
Only 40 percent of the first generation to begin receiving Social Security benefits at its inception in 1935 lived to age 65. Those who did survived an average of 13 additional years. By contrast, 84 percent of the males born in 1985 can expect to live to retirement age, and about 20 years beyond that.
Between now and 2050, the number of people over 85 is expected to double as a share of the population, from 1.5 percent to 3.7 percent.
These trends will put an enormous strain on both programs.
As the ranks of the elderly swell, medical needs will grow apace. That will be particularly true in view of the growing numbers of those who will qualify as "very old."
Medicare currently saps about 2.3 percent of the overall value of the economy, according to the president's Council of Economic Advisers. That is expected to rise to 8.5 percent by 2075. The combined cost of Medicare and Social Security in that year is expected to reach 15 percent – significantly more than the government now collects in personal income taxes.
There is no shortage of ideas on how to remedy the situation.
President Bush has proposed offering a prescription drug benefit as an inducement to draw retirees into less expensive private insurance plans as alternatives to traditional Medicare coverage.
Democrats and Republicans alike are pushing a variety of proposals to refashion Social Security, primarily by offering workers greater control over how their payroll taxes are invested.
Yet the prospects for imminent major reform are dim because of the political passions aroused by both programs.
Most analysts agree that eventual solutions inevitably will call for politically painful choices – perhaps involving tax increases, benefit cuts or eligibility adjustments. To most politicians, those are singularly unappealing measures, given the electoral clout of older voters.
Rudolph Penner, a former director of the Congressional Budget Office, noted that other countries have faced similar problems.
"It's extremely difficult for a democracy to deal with its elderly citizens, except in a crisis mode," Penner said.