The Social Security Trustees Report for 2011 is now available, right on the dot. As was the case last year both Social Security and Medicare are in the red in the sense that what they’ve paid out in benefits exceeds what’s been taken in in revenues. I should warn you in advance that, if I were to use all of the quotation marks that would be necessary (because they’re quotations) for things that aren’t what they’re being called in the report, this post would rapidly become unreadable. It won’t be any too readable as it is: the Trustees Report is enough to make anybody’s eyes cross.
Suffice it to say that the Social Security Trust Fund is, by law, a stack of IOUs from the Treasury on which the Fund is paid interest (more on that later).
In 2010 the Trust Fund was in the red by $49 billion. In 2011 that figure declined to $46 billion. The increase on the expense side of the ledger was not unforeseen: more people are retiring and, consequently, receiving benefits and that’s been expected for more than sixty years. The decrease on the income side, due to the large number of people who are unemployed and, consequently, aren’t paying into the system, was less foreseen.
The significance of this comes when you look at it from a cashflow standpoint. As recently as 2007 Social Security was in the black to the tune of $180 billion per year—it was providing positive cashflow. Now it’s contributing to negative cashflow and is likely to do so for the foreseeable future. By 2036 Social Security is expected to have spent down its trust fund, be receiving no more interest on that trust fund, and be entirely dependent on tax income. BTW, if the federal government used any sort of reasonable accounting standards the surpluses of the second term of the Clinton Administration would vanish. They were largely due to the increases in the Social Security Trust Fund that occurred. Remember those IOUs? The actual cash goes into the Treasury.
I don’t think that the significance of this reversal from cashflow positive to cashflow negative can be overstated. It’s responsible for a big chunk of the deficit.
Medicare is, if anything, in even worse shape. Its expenditures exceeded its revenues (including interest) by roughly $60 billion in 2010, much, much more than Social Security with far fewer assets. That shortfall is anticipated to be about $70 billion in 2011 and, absent some major change in the plan, it will never go into the black again. The HI component of Medicare (the part that pays hospitals) is broke now.
Medicare expenses are growing at roughly 9% per year. When you add insolvency to rapidly growing costs, you understand the obsessive attention I’ve paid to healthcare reform over the years. Slowing Medicare expenses isn’t enough. It’s already broke. We’ve got to change the system and we’ve got to do it now.
Here’s how the trustees summarize the situation:
Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided.
The financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected can adequately prepare.
Bruce Krasting, who’s been on top of the Social Security and Medicare Trust Funds for a long time, points out the significance of the interest payments that the Social Security Trust Fund is receiving:
There is one interesting thing to consider with SS. They have this paper surplus called a Trust Fund. That Trust Fund earns paper interest. Lots of it. At the end of the year that fund will total $2.65 trillion. It will have an investment average maturity of 7 years. The rate of interest paid to SS is currently 4.25%.
Now consider that the Treasury yields today for 7 years is a measly 1.58%. The difference of 2.67% comes to a whopping $70 billion a year in “excess†interest being paid to SS.
If one applied this same thinking to SS’s sisters, (the Military and Federal Workers Funds) it comes to ~$4T of principal that we are (over) paying interest on. The excess interest on the whole mess that is referred to as the “Federal Pension Obligations†comes to a very important $100+ billion. Every Year!
I’m not sure what to make of this. Clearly society is providing a significant ON BUDGET subsidy to these programs (this alone is 7% of the deficit). At a time when everything else is getting ReFi-ed at lower rates (and savers are getting creamed on their holdings) there should be a discussion of the biggest ReFi of them all, the federal Trust Funds.
Or, said another way, the longterm solvency of Social Security is a pleasant fiction. If you claim to pay a high enough interest rate on such a large obligation you can come up with nearly any number you care to.
One of the ways in which I part company from Republicans is on Social Security. I think it’s necessary. If it didn’t exist we would need to create it. For at least half the population there is no realistic prospect that they can save enough or that there are investments sound enough that they could provide for their old age. And if we rely exclusively on the other half of the population (who would be doing their own saving for their retirements) to do the consuming that makes our economy tick it makes the prospects for that economy dim indeed.
Holy fuck…we are so…well fucked. Sorry not going to “censor” that line, because to do so would reduce how…well, fucked, we really are. That growth level, just to give those here not used to working with numbers some idea of how important this is, is 3x the size of the growth in GDP. Leave that kind of relationship in place and in short order Our entire GDP will be nothing but Medicare (yeah I know it would never actually get to that point). Consider the following numeric example. GDP is 14.5 trillion dollars, lets say that Medicare is 400 billion, or 0.4 trillion. Medicare is about 2.76% of GDP to start with (note this is about half of what Medicare’s share of GDP was in 2009 so I’m being quite generous here). In 2022 Medicare will have doubled its share of GDP and will now be $1.03 trillion. In 2034 it will again double and be over 10.8% of GDP at $2.9 trillion dollars. If we switch to a more realistic number (using the 5.3%) in 2022 Medicare will be at 10.4% of GDP at just under $2 trillion and in 2034 Medicare will be consuming more than 1 out of every 5 dollars of GDP.
Now, yes, I know that is extrapolating things as they currently stand and that if there is a change it could be much better…or much worse. And that such an unsustainable path wont be sustained–i.e. things might go completely off the rails well before 2022. But that should fucking scare the fuck out of everyone here. Michael, look at your children…there are already impoverished and broke. Everyone else who has kids, look at what has happened to their future.
But nope, we should defend Medicare….only if you are a habitual crack cocaine user and don’t expect to live more than a few more months sure then it makes sense.
Oh and if you think economic growth is the answer you really really are on some serious mind altering drugs. The kind of growth we’d need to keep Medicare at 5.3% of GDP is…9%. Sustained growth like that is impossible. Aside from a miracle it will never ever happen. Ever.
Here is my bold prediction. Not going to happen. We are rushing, inevitably, towards economic irrelevancy. Look at the UK, that is where we will end up.
According to the Trustees Report 2010 Medicare spending was around $650 billion. 2011 spending is estimated to be around $700 billion. I know that will make your day.
And people wonder why I’ve been bitching so obsessively about this for so long.
In a perverse sort of way it does…kind of like that picking at a scab sort of way. Not good for, not glad I do it, but still satisfying because it means we are even more screwed. The larger Medicare is now, and with that growth rate the faster we are hurtling towards the point where we go off the rails. And as we are falling off the cliff and rushing to the bottom I’ll take great perverse delight in saying to everyone, “I told you so….do you think it will hurt when you slam into the ground and your head is passing through your rectum…steve, you’re our resident doctor, your thoughts please?”
Yes, Medicare really is the primary source of our future debt (interest payments eventually top it IIRC). It needs to be addressed sooner rather than later. We have a lot of functioning models of health care that work pretty well in other countries, so it can be done. What you miss here is that private insurance costs are rising at least as fast, probably faster, than Medicare costs. Well before 2034, health care, on its current path, will take up 1/3 of our economy. Is that sustainable?
On Social Security, there has been tremendous growth in the disability part. I think, just based on personal observation, that this has become a major scam. I keep meaning to look this up, but I am not really sure how all of these people get on disability. It takes input from some medical source I believe, but it also takes a judge to approve it. I think this has become a real industry and I wish it would be addressed.
Steve
You don’t see a difference between public and private provision of private goods? None at all? If that is the case, then further discussion is rather pointless until you rectify this deficiency.
Sigh. Yes, I do. My point is twofold. First, at some percent of GDP health care enhances economic performance. Vaccines, antibiotics, maternal care and a few other things are pretty obvious I think. At some point, medicine becomes a drag on the total economy. We stop getting useful returns and money spent on medical care would be much better spent elsewhere. I suspect we are at or past that point already, though I concede there is no perfect way to measure this. Still, I suspect you will probably agree.
Given this premise, it is clear that this private provision of this private good is rising as fast or faster than public spending. Is that sustainable? I do not think so. Indeed, while we talk a lot about Medicare, it completely puzzles me that that spending on the private side is so high. As I have noted, private insurance pays much better than public insurance. As health care pundits on the right like to note, docs are (supposedly) dropping out of Medicare and Medicaid because they pay much less than does private insurance. So, from my POV, you have private insurance acting as the force driving up costs.
Which gets back to Medicare. I am not convinced that you can solve Medicare without solving private insurance also. You can come up with paper solutions, but they must be politically feasible. We need to find a way to reduce medical costs, which means people will get less care and/or people in medicine will get paid less. We need to put everyone into the same system, then solve this for everyone.
Steve
But that should fucking scare the fuck out of everyone here.
Long past that. Assuming nothing else crashes the system, Medicare will do so by itself by 2015. I expect sovereign debt will do so much sooner, possibly starting (in a big, indisputable way) by Christmas of this year.
But none of the major politicians want to do anything about it. You have to get to the fringe people like Ron Paul before you get to anyone who is even half-way serious on these matters. And those guys are considered absolutely nuts by most of the electorate. (To be fair, some of them are.) Collapse is inevitable. So stop worrying about people’s children already being broke – their concerns will be much more immediate than that.
Given this premise, it is clear that this private provision of this private good is rising as fast or faster than public spending. Is that sustainable? I do not think so.
Verdon’s point is that the private sector HC costs will eventually stop growing because eventually the private sector won’t be able to pay for more. The government has other means to keep paying for more long after it should have stopped.
steve,
My point is that a privately provided private good will tend to have a built in mechanism that prohibits its provision from being unsustainable to the point where it damages the economy. A public provided private good on the other hand has a much more clumsy mechanism for reigning in run away spending. Eventually expenditures on private health care would be curtailed as employers cut back as do consumers. But the method for reducing Medicare is considerably harder since the elderly are a voting block that has considerable power both at the local, state, and federal levels.
Part of the reason we see such rapid growth in even private health care is due to bad public policy decisions, but I’d still be willing to bet that private health care spending would decline sooner than public spending.
Your solution can be found here then.
I wish I could say you are a crazy ass son of a bitch…but I can’t.
Mad, Steve V., but not crazy.
If healthcare costs rise high enough, the response in the private system won’t be to cut back. It will be to demand subsidies or nationalization.
We pay three times as much on healthcare per capita as any other country in the world. We pay more for the same procedures than other countries. Medical education costs a great deal more than in any other country of the world (without a good deal of reason other than it’s what the market will bear). To the extent that excess demand is a problem IMO it’s just people doing what their doctors tell them.
Additionally, when people economize on healthcare they’re as likely to economize foolishly as prudently. Turning something that might have been controlled at minimal expense into a major healthcare incident may not accomplish net savings in healthcare spending.
My point is that there’s a broad dysfunction in the system. While I agree with Steve Verdon that the problem is one of incentives I don’t think it’s merely consumer incentives that are problematic. Supplier incentives need to change, too.
There is no easy answer. Steve’s earlier insertion of the growing SS disability claims are an important addition to this discussion. I don’t understand how so many people can qualify so young for SS disability, either. But, it has taken a toll, and is helping to achieve an early insolvency of this program.
All I can say is that there has been poor oversight in managing SS. And, the bigger picture of anticipating our lopsided groups — those paying into the system vs those receiving benefits — has been lousy.
It seems the only immediate measures could be raising the SS age, means-testing (unfair but may be necessary), and restructuring SS for younger people so they have more options to plan for their old age, other than waiting for something that will be defunct by the time they reach retirement. Qualification for disability under SS should also be reviewed and retooled — in what way, I don’t know.
Anyway, the information supplied on this thread was revealing but discouraging.
I don’t understand how so many people can qualify so young for SS disability, either.
Obesity related illnesses. Example: I have a friend who has lost his feet to diabetes by his mid-40s. All his experience is useless now. Thus disability. Not saying that’s all of it, but that’s some of it.
As the economy gets worse, people are going to look for whatever income they can get. Scamming the government might not be ethical, but it probably beats homelessness. And what the Hell, it’s not like the bankers and financiers didn’t get trillions for all their failure – a little disability claim is nothing by comparison.
“My point is that a privately provided private good will tend to have a built in mechanism that prohibits its provision from being unsustainable to the point where it damages the economy. ”
Then why hasnt it happened yet? Find me anyone in business who does not think they are paying too much for health care. Why are we paying 50%-75% more than the average OECD country? I think that the market has failed for health care. Why would it not be just as likely that we would continue the current trend with fewer and fewer people insured (receiving complete care) while fewer are not?
I think it more likely, given our past and current trends, that private costs will continue to grow until it is clear that they are clearly hurting our economy a lot. I think it can go on for quite a while slowing down growth.
But, even if I am wrong and you right, how do you cut spending for Medicare while doing nothing about private insurance? As the costs continue to diverge how do you get docs to see Medicare patients? How do you get the old folks, the ones who really vote, to not exert their power and get those Medicare rates raised? If everyone is in the same system, when you cut reimbursements for a procedure, it afects old people and young people alike.
Steve
Currently more and more doctors are opting out of medicare and medicaid. Some shrewd physicians are developing private practices requiring an ‘annual fee’ from selected patients to be considered part of their patient base.
Man is very adaptive (Darwinian-like) in seeking to circumvent a bad situation. The more and more that government meddles in the private sector, or nationalizes such agencies such a health care, there will be a greater black market of medical services for those who can afford it. And, for the rest it will be very competitive, lower quality of care coupled by long waits to even see a doctor, and rationing what care is available on both need and probably who you know.
We haven’t reached that point yet.
Cross country comparisons are not easy. You have to factor in all sorts of things that can mess up such comparisons.
Market? We don’t have a market, not a pure one. Everything is tainted by government intervention. Everything.
You are suggesting a knifes edge here, that the rate of increase in expenditures has to exactly equal the number of people opting out of insurance…which is one way consumers can cut back. Of course, a person without any insurance who ends up at the hospital will get treated. I wonder how we account for such spending? Public or private?
I think it is well past time to eliminate the tax preferred status of health care benefits. Treat it exactly like income and tax it. Subsidize anything and you will get more of it, contrary to what many Leftist dimwits think, this is true even of health care.