Academic journal article Economic Review (Kansas City, MO)

Social Security and Medicare: The Impending Fiscal Challenge

Academic journal article Economic Review (Kansas City, MO)

Social Security and Medicare: The Impending Fiscal Challenge

Article excerpt

Social Security--and the solvency of its Trust Fund--have increasingly become a focus of discussion in the media and policy circles. In President Bush's 2005 State of the Union address, for example, more than a fifth of the address dealt with Social Security. The basic problem is that promised benefits will soon exceed program revenues. Without changes in benefits or funding, the Trustees of Social Security project that assets in the Trust Fund will be depleted in 2041.

While Social Security is a serious problem for taxpayers and beneficiaries, Medicare poses an even greater challenge. Indeed, with healthcare costs rising much faster than the growth in the economy, Medicare spending is also on an unsustainable path. Together, the two programs' benefits currently amount to about 6 percent of GDP By 2080 they are projected to swell to 20 percent.

With spending on these two programs projected to grow faster than the nation's GDP, the Board of Trustees of Social Security and Medicare have concluded that "We do not believe the currently projected long-run growth rates of Social Security and Medicare are sustainable under current financing arrangements." To keep the programs solvent without slashing benefits or increasing tax revenues, the federal budget deficit must grow drastically. Thus, finding permanent solutions to these problems is critical, and the problems only become larger the longer reforms are delayed.

This article provides a framework for understanding the nature of the fiscal challenges posed by Social Security and Medicare--a prerequisite for finding specific solutions. The first section of the article describes the fiscal challenge of Social Security. The second section describes the same for Medicare. The third section puts the nature of the Social Security and Medicare challenges in perspective. The fourth section discusses the growing consequences of waiting to solve these severe problems.


While Social Security is not an imminent crisis for the nation, it does represent a significant and inevitable challenge. As the baby-boom generation begins to retire, Social Security expenditures are projected to increase much faster than revenues. Indeed, current projections indicate that the Social Security Trust Fund will run out of money in 2041. In this event, new revenue sources will be needed to pay for promised expenditures--or else promised benefits must be cut to match revenues. This section provides some background on the history and structure of Social Security and then takes a detailed look at the looming fiscal challenge.

A brief history of Social Security

In 1934, President Franklin D. Roosevelt announced his intention to Congress to create a social insurance program that would provide economic security for the aged. Congress drafted and the president signed the Social Security Act in 1935, creating a social insurance program that supported individuals 65 and older after retirement.

Social Security is designed to protect against the loss of earnings due to retirement, death, or disability. Social Security is actually two separate government programs--Federal Old-Age Survivors Insurance (OASI) and Disability Insurance (DI). OASI pays monthly benefits to retired workers or to the survivors of deceased workers, while DI pays monthly benefits to disabled workers and their families. Together, the programs are known as OASDI.

The Social Security Act has been amended numerous times since 1935 (Table 1). Most of the changes through the early 1970s expanded the scope of the program. Beginning in 1977, however, many of the changes were designed to slow the growth of benefits as Social Security began to Face funding shortfalls.

Social Security benefits and revenues

While Social Security is widely thought of as a program that pays benefits to retirees, only about two-thirds of beneficiaries are retirees. …

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