Private Investment Yields More for Less

By Ferrara, Peter J. | Insight on the News, May 2, 1994 | Go to article overview

Private Investment Yields More for Less


Ferrara, Peter J., Insight on the News


The real issue is not whether Social Security is causing the deficit, but whether the Social Security benefit cuts recommend ed by former Sen. Warren Rudman would reduce the deficit - which they would - and whether such cuts would be desirable - which they would not

Moreover, former Social Security commissioner Robert Ball evades the real issue by not talking about the time when Social Security will add to the deficit or the size of those additions. And he focuses only on part of the problem - the old age, survivors an disability insurance fund, or OASI as, inexplicably, does Rudman.

To understand the trouble we're in, we must look at the whole problem. Let's look at the projected effect on the deficit of all the payroll-tax financed trust funds in our social insurance system, including disability insurance and hospital insurance as well as OASI. If we are talking about the long-term federal deficit, all federal tax and spending programs must be included; there is no reason to exclude any of these insurance trust funds.

Under the Social Security Administration's "intermediate" projections, payroll-tax revenues for the three trust funds combined start to fall short of benefit promises in 2005, only 11 years from now. This shortfall then would add to the deficit. The three trust funds together will have to turn in bonds to the federal government to ask for sufficient cash to cover this deficit between payroll taxes and benefits. But, as Rudman correctly states, the federal government has no assets to back these bonds. Therefore, the government will have to get the money to redeem these bonds by increasing total federal borrowing (letting the deficit just grow by the amount of the social insurance trust fund shortfall), by increasing taxes or by cutting other federal spending.

The amount of this deficit in 2005 is only $2.5 billion in constant 1993 dollars. But by 2010 it grows to almost $40 billion in 1993 dollars. By 2015, it grows to $120 billion. By 2020, this deficit from the social insurance trust funds alone grows to an incredible $226.5 billion in 1993 dollars.

But that is not all. Only about 25 percent of Medicare's physician coverage (Medicare Part B) is paid for by the retirees covered by the program; the federal government finances the remaining 75 percent of Medicare out of general revenues. The federal government must raise these funds every year either through increased borrowing and a bigger deficit, increased taxes or cuts in other government spending.

The current annual general revenue contribution for this program is about 50 billion. But the statistics show that by 2005 the amount will almost double to about $91 billion in constant 1993 dollars. By 2010, the amount will grow to about $112 billion. Counting the $39 billion deficit in the trust funds that year, the general revenue burden on the federal government to finance Social Security and Medicare will be about 150 billion in 1993 dollars, effectively adding that much to the federal deficit in that year.

By 2018, Social Security and Medicare programs alone will add $343.1 billion in 1993 dollars to the federal deficit, more than the entire federal deficit today. These programs will require this much in general revenues from the federal government in addition to the hundreds of billions in payroll tax revenues.

After that point, if all three trust funds were combined, they would be entirely exhausted. Paying all benefits promised to young people entering the work force today would require a total payroll tax rate of about 27 percent in in 40 to 50 years, compared with 15.3 percent today, almost doubt.

And this is only under the so-called intermediate assumptions. Under the so-called pessimistic assumptions that may be more realistic, these programs alone would add more than $200 billion a year to the federal deficit by 2006 - only 12 years away. In addition, paying all promised benefits to young people entering the work force today would require a total payroll tax rate of about 40 percent, almost tripling today's rate. …

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