Jeopardizing the Future of Social Security and Medicare

The President's budget undermines the future of Medicare by diverting surpluses dedicated to paying benefits promised in existing law and using the money for new purposes. The budget also suggests that the President would do the same to Social Security. Over the next ten years, the President proposes to start diverting funds from the Medicare HI surplus, $153 billion over ten years, to create a new prescription drug benefit and finance undefined "reforms." His principles for "reform" of Social Security also imply that he would use the $600 billion of the Social Security surplus not devoted to debt reduction to institute private retirement accounts invested in the stock market.

Because the Social Security and Medicare surpluses are already committed to paying benefits promised in existing law, diverting money from the trust funds for new purposes can mean only one of two things. Either the budget double counts, or it shortens the solvency of the Social Security and Medicare HI Trust Funds, which eventually will force severe benefit cuts or tax increases. If one accepts that the same dollars cannot be used twice, then the only possible conclusion is that the budget gambles the future of the Social Security and Medicare Trust Funds.

If Republicans follow through with a privatization proposal based on a "carve-out" of the Social Security surplus as the President advocated during the campaign, it will shorten the program's life. The chart below shows the impact on the Social Security Trust Fund if $600 billion over the next ten years is diverted for new stock market retirement accounts. The Social Security actuaries currently project that the trust fund will run dry 37 years from now, in 2038. Taking $600 billion away from the Social Security Trust Fund over the next ten years corresponds to a "carve-out" of 1.1 percentage points from payroll taxes. Such a "carve-out" shortens the solvency of the Social Security Trust Fund by nine years, bringing the date of insolvency back to 2029.

The chart below shows a similar effect on the Medicare HI Trust Fund from Republicans' proposed diversion of $153 billion over ten years. Currently, the Medicare actuaries project that the HI Trust Fund will run dry in 2029. However, a "carve-out" that diverts $153 billion over ten years out of the Medicare HI Trust Fund shortens its solvency to 2024, five years sooner.

Because the Administration provides no specifics, it is not clear how the proposed "reforms" would work. However, it is clear that these "reforms" would somehow have to compensate for the effect that diverting resources from the trust funds has on the existing Social Security and Medicare benefits. It is conceivable, though perhaps unlikely, that stock market returns for individual retirement accounts or efficiency gains due to competition with private medical accounts might offset the severe benefit cuts from the existing programs that shortened solvency would require. However, the budget's large tax cut undermines solvency because it consumes essentially all resources outside of the Social Security and Medicare surpluses that might be used instead to extend solvency.

By contrast, Democrats have consistently advocated putting more resources into Social Security and Medicare to extend, rather than shorten, the solvency of these two bedrock programs for the elderly. Social Security and Medicare are our most successful government programs, ensuring that millions of seniors live out their years in dignity. Democrats are reluctant to sacrifice the important protections these programs provide to fund unknown and untested innovations

Back to Top
Next: Appropriated Programs
Previous: The Bush Tax Cut