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Tuesday, May 08, 2007

2007: The Year Of The Soc. Sec & Medicare Swing

The Trustees' report for 2007 was released this month, and everyone really ought to read the summary, at least:
The initial negative amounts shown for OASDI indicate that tax income exceeds outgo (which occurs during 2007-16) and represent net revenues to the Treasury that result in the issuance of Treasury bonds to the trust funds. Those OASDI net revenues are more than offset by the Medicare general revenue requirements under current law. For instance, in 2007 the Social Security tax income surplus ($85 billion) is estimated to be significantly smaller than the statutory Medicare Part B and Part D general revenue transfers, resulting in an overall cash requirement of $100 billion (0.7 percent of GDP) from the general fund of the Treasury.

The combined difference grows each year, so that by 2018, net revenue flows from the general fund will total $545 billion (2.3 percent of GDP). The positive amounts that begin in 2017 for OASDI, and in 2007 for HI, initially represent payments the Treasury must make to the trust funds when assets are redeemed to help pay benefits in years prior to exhaustion of the funds. Note that neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.
I am guessing that no politician, Democratic or RRepublican, is going to bring this up, so I guess it's up to bloggers. We've been negative on Medicare for a bit now, but 2007 is the first year we expect to be negative overall on both programs.

When money comes out of the general fund, we are paying benefits from revenue like personal and corporate income taxes. A 100 billion dollar shortfall is not such a big item this year, although it definitely makes it harder to balance the budget. By 2015 the projected total cash flow shortfall will be causing real problems and will have to be dealt with. The trust fund balances are a non issue - if Congress announced that it was doubling them this year, or eliminating them entirely, it would have no effect at all. The only source of funds when the trust funds are redeemed are additional public debt or additional public taxation.

The bottom line is that when payroll taxes fail to pay for these programs, the benefits paid must come from general fund revenue. The bulk of the projected increase is coming from the baby boomer wave of retirements, which is due to begin next year:
Chart E- Projected OASDI and HI Tax Income Shortfall plus the 75-Percent General Fund Revenue Contribution to SMI (Percentage of GDP)


This is what matters; this is the money we have to find in the next decade. It will either require a significant boost in taxation on a relatively large group of the population, or dropping expenditure in other programs. In recent times we have currently sent about 20% of GDP to Washington in the form of taxes. By 2015, we are going to have to send a lot more. That's reality. SMI is the Medicare insurance that pays for drugs and doctor visits; HI is Medicare hospital coverage, and OASDI is Social Security and Disability. The general funds already pay for major parts of Medicare; what is truly different is just that so many more people will be retiring and using these benefits at the same time that we have less workers remitting payroll taxes. It's the retiree/worker ratio that really causes the crisis.

We haven't got long to get real about all this. Friday's employment report showed worker participation down to 63%. If current trends hold, these projections will get slightly worse each year. Any meaningful discussion of the budget deficit must deal with this issue. I am going to filch from my last post on this and repost the following graph:

It's the summit of bad taste to quote yourself, but I will. If you look at this chart carefully, you can see that when we were running budget surpluses in the late 1990s, it was because there was a temporary dip in the GDP percentage for both of these programs (due to demographics/bubble), so we spent less proportionally on them.


Comments:
I remember the AARP junk mail I've been getting -- all the "DON'T LET THOSE GREEDY GEN-XERS CHEAT YOU OUT OF *YOUR* SOCIAL SECURITY! YOU EARNED EVERY PENNY OF *YOUR* SOCIAL SECURITY! YOU'RE *ENTITLED* TO EVERY PENNY! YOU'RE *ENTITLED*! YOU'RE *ENTITLED! YOU'RE *ENTITLED*!"

The exact attitude my parents developed after they retired (to a Nevada border casino town -- big mistake) and their savings ran low. Apres Moi, le Deluge, i.e. "We'll be gone by then, so That's YOUR Problem!" And geezers VOTE.
 
You know, I know quite a few oldsters who love to gamble!

At this point, it's not the 75-80s who will cause the problem. It's the baby boomers. They, in all fairness, have essentially paid extra income tax all these years on their incomes. Naturally they don't want to see a cut in THEIR benefits. They have paid proportionally far more than their parents did for theirs.

Nonetheless, reality is reality. Social Security, through some combination of regressive benefit structure and higher taxation, will become mostly an income support program for older, poorer people.

It's probable that there will be an income tax surcharge for Medicare. A high one.

This is why I tell people SAVE SAVE SAVE.
 
You know, I know quite a few oldsters who love to gamble!

With my parents, I don't think it was that so much as a casino acts as a money siphon for the surrounding area. Dad was a pretty good amateur mechanic, carpenter, and general handyman, and expected to be able to supplement his retirement doing that on the side.

However, in a casino town, every time somebody had two coins to rub together, they went across the state line and drop-coin-pull-lever, drop-coin-pull-lever. Nobody had any money left for such things as Dad was counting on for side income.

In '94, I was there for Dad's funeral. Because of estrangement fallout from a family feud, I ended up staying in one of the casino hotels -- $8 a night for full hotel accomodations. $3 a meal, all you can eat. How can a non-casino motel or restaurant compete with that?

The way casino hotels are laid out, you can't go anywhere without crossing the casino floor. Being winter, it was always packed with snowbirds -- 89-90-somethings sitting there with their walkers and oxygen tanks beside them, drop-coin-pull-lever, drop-coin-pull-lever, drop-coin-pull-lever...
 
Well it is a business that's focused on getting people to throw down money! And they know their business!

I have always been curious about why some elderly people seem to develop gambling mania?
 
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