The Medicare/SS time-bomb

As President Bush and the Democratic Congress prepare to war over $23 billion in domestic discretionary spending in a 2008 fiscal year budget that will approach $3 trillion, now is a good time to talk about the $90 trillion Social Security and Medicare elephant in the room. It is a virtual certainty that both political parties will ignore it, at least until the next president is inaugurated 19 months from now. Oh, there will be rhetorical heat during the presidential and congressional campaigns. But in terms of substantive, responsible legislation passed by Congress and signed by the president, expect nothing — zilch.

Between now and January 2009, the $90 trillion elephant, which embodies the present value of the unfunded obligations of Social Security ($15.6 trillion) and Medicare ($74.3 trillion) over the infinite horizon, will undoubtedly grow much larger. Indeed, the present value of the unfunded obligations just for Medicare increased by $3.7 trillion in 2006 alone. Figures expressed in terms of present value represent the amount of money that would have to be set aside today to fund the long-term Social Security and Medicare benefits that politicians from both parties have promised their constituents. These figures are over and above payroll-tax revenues dedicated to Social Security and Medicare and premiums paid by Medicare beneficiaries. Unfunded obligations represent the level of claims on general tax revenues (mostly individual and corporate income taxes) that will be necessary to fund these promises beginning in the not-too-distant future.

Citing the 2006 Medicare trustees’ report, Mr. Bush’s 2008 budget, which was issued in February, referred to Medicare’s “unfunded obligations (the gap between dedicated receipts and projected costs) of [$70.6] trillion over the infinite horizon.” However, as noted above, the present value of Medicare’s unfunded liabilities increased to $74.3 trillion during 2006, according to the 2007 trustees’ report, which was issued in April. Specifically, in 2006, the increases in Medicare’s unfunded obligations were $1.1 trillion for Medicare Part A (hospital insurance), which rose from $28.4 trillion to $29.5 trillion; $1.5 trillion for Part B (doctors’s services and other outpatient expenses), which jumped from $26.2 trillion to $27.7 trillion; and $1.1 trillion for Part D (prescription drugs), which increased from $16 trillion to $17.1 trillion. (Remember, these are present-value figures.)

Thus, given the $3.7 trillion total increase in 2006, the present value of Medicare’s unfunded obligations appear to be growing by $300 billion per month. That’s right: $300 billion per month. At that rate, they should increase by another $5.7 trillion between now and January 2009, when the next president enters office. With the first wave of Baby Boomers becoming eligible for Social Security next year and for Medicare three years later, the bipartisan, presidential-congressional abdication of long-term fiscal responsibility that we shall witness over the next year and a half will be nothing less than astonishing.

Compared to Medicare, Social Security is a piker. Including the $2 trillion in special Treasury bonds that occupy Social Security’s trust funds, which will have to be redeemed with general-fund tax revenue, the present value of the unfunded obligations for Social Security’s retirement and disability programs totals $15.6 trillion over the infinite horizon.

To appreciate the relative size of the $90 trillion in unfunded liabilities for Social Security and Medicare, consider four facts: (1) This year’s entire U.S. economic output, measured by its gross domestic product, will be $14 trillion. (2) Today, the total U.S. public debt outstanding (i.e., the “national debt”) is $8.8 trillion, which, despite having skyrocketed by $3.1 trillion (54 percent) since Mr. Bush entered office, is still less than 10 percent of the present value of the entitlement nightmare galloping toward us. (3) The total net worth (as of March 31) of all U.S. households and nonprofit organizations, including their stockholdings, corporate and Treasury bondholdings, housing equity, SUVs and high-definition plasma TVs, is $56.2 trillion. (4) The total market capitalization (number of stock shares times the share price) of the S & P 500 (the 500 leading U.S. corporations) was $12.7 trillion as of March 31.

The bipartisan, presidential-congressional abdication of long-term fiscal responsibility that we shall witness over the next year and a half will be nothing less than incomprehensible.