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Without reform, Social Security's and Medicare's future is inevitable, like it or not.

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The Inevitable Future of Entitlements

Without reform, Social Security’s and Medicare’s future is inevitable, like it or not.

When a Roman legion advanced against an enemy, it approached slowly, but its arrival was inevitable. Rome’s troops lined up behind a wall of shields that moved with a discipline few others possessed. Enemies didn’t know the exact moment when the soldiers would reach them, and the slaughter would begin. But the outcome was seldom in doubt. 

Social Security’s and Medicare’s future problems are equally predictable, even if their exact timing is uncertain. As millions of baby boomers approach retirement, the programs’ cash surpluses will shrink and then disappear. Medicare’s is already gone. Once that happens, these programs will consume ever-growing amounts of general revenue dollars to meet their obligations — money that now pays for everything from environmental programs to highway construction to defense. Eventually, benefits will have to be reduced, taxes will have to climb to levels that would cause economic stagnation, or the rest of the government will have to shrink to accommodate Social Security and Medicare. 

The timing of this crunch matters less than its inevitability. Forget whether Social Security will begin to spend more on paying benefits than it receives in taxes in 2016 or 2017; ask what these deficits will mean to our economy. Our children must either pay retirement and health benefits to their parents, or pay for programs that help their own children. No amount of wishful thinking will change that. 

The reason that entitlement deficits are inevitable is fairly simple. Demographics are more predictable than most events. Millions of baby boomers begin to retire this year, when those born in 1946 reach Social Security’s early retirement age of 62. Three years later, they will begin to qualify for Medicare. From now until 2025, every year will see another crop of baby boomers reach the 62 year-old threshold. Because the baby boomers haven’t produced enough children to replace themselves, the number of taxpaying workers will shrink.

Demographic trends don’t change rapidly. It takes about 25 years to grow a new taxpayer. We can estimate with surprising accuracy how many people born in a particular year will live to reach retirement. The retirees of 2070, for example, were all born in 2003. We can see and count them today. 

This is critical, because a retiree’s Social Security and Medicare benefits actually come from the taxes of those currently working. The programs’ finances are based on the relationship between the number of workers paying taxes and the number of retirees receiving benefits. 

Back in 1950, as the baby boom was just getting started, each retiree’s Social Security benefit was divided among 16 workers. Medicare didn’t even exist. Taxes could be kept low. Today, that number has dropped to 3.3 workers per retiree, and by 2025, it will reach — and remain at — about two workers per retiree. Each married couple will have to pay, in addition to their own family’s expenses, Social Security retirement benefits for one retiree. Medicare costs will cost them even more, mainly because health care costs are estimated to grow much faster than the growth of inflation. The two programs together would cost every American the same amount to pay off as a $175,000 mortgage. It’s wrong for this generation to saddle their kids and grandkids with that kind of burden. 

This future is coming quickly. Social Security’s annual surpluses will begin to fall this year. Over roughly the next 10 years, those Social Security surpluses, about $100 billion a year at their peak, will continue to shrink and then disappear. Somewhere around 2017, on top of replacing Social Security’s $100 billion annual surplus, Congress will have to find billions more so that Social Security can pay all the benefits it has promised. Within about five years, that additional money will reach $100 billion a year (not counting inflation). From there, the annual demands will reach first $200 billion a year, and soon $300 billion a year. 

Then there’s Medicare. Medicare’s problem is about four times larger than Social Security’s. Together, Social Security, Medicare and Medicaid in 2052 will consume an amount equal to every dollar the U.S. government collects in taxes, assuming that taxes stay at historical levels. There would be nothing left to finance the entire rest of the government. 

It’s time to stop focusing on which year the red ink will start to flow and instead decide what to do once the deficits begin. The year the problems begin may change, but the amount of additional money that Social Security and Medicare need will still rise. 

Without reform, Social Security’s and Medicare’s future is inevitable, like it or not. We can either prepare now, or dither about what year it will happen. Wishful thinking didn’t stop the Romans. It won’t prevent entitlement problems, either.

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Written By

Mr. John is senior research fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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