Entitlement Madness, Part I

In the near future, the Social Security/Medicare Trustees will produce their annual report. Gloomy as the report will no doubt be, it will likely be a whitewash of the underlying reality. If the past is a guide to the future, the release of the report will focus everyone's attention on the trust funds (which scholars understand have no economic importance whatsoever) and ignore the huge unfunded liabilities we keep piling up and the severe cash flow problems elderly entitlement programs are already creating.

These obligations are especially important in light of the enormous increase in unfunded liability and cash flow deficits that are about to be added. Currently, about 100 million people depend on Medicare and Medicaid for their health care. Under President Obama's new health reform plan, an additional 100 million or so could be enrolled in public and quasi-public plans with the entitlement guarantee that their premiums will not exceed 10% of family income.


Ground Control to Major Tom

As of last year's report, Social Security and Medicare had an unfunded liability in excess of $100 trillion (see Table I), about 6 ½ times the size of the entire economy. This is the excess of promises we have made over and above expected taxes and premiums. To avoid draconian benefit cuts or tax increase in future years we would need to have that $100 trillion in the bank, earning interest today. But of course we do not. (Although it is of small comfort, Jagadeesh Gokhale has shown that our European trading partners are in even worse shape.)

The $100 trillion figure is based on looking indefinitely into the future. (For reasons we have explained before a shorter time horizon gives misleading estimates.) Yet a different way of accounting is to use the method private companies and state and local governments now have to use. If we halted these programs tomorrow, collecting no more taxes and allowing no more benefit accruals, how much do we owe people for benefits they have already earned? Answer: $52 trillion.

Of more immediate concern is the cash flow problem these programs are creating. Social Security and Medicare combined are paying out more than they are taking in. As the baby boomers retire, the deficit will grow dramatically. By 2012, we will need 1 in every 10 income tax dollars to cover the deficits in these two programs. By 2020, we will need 1 in 4. By 2030, we will need 1 in 2. (See Figure I.) Clearly, elderly entitlements are on a course to crowd out everything else the federal government is doing. And this doesn't include Medicaid.

Of course, all of these numbers are based on underlying assumptions. The most important being assumptions about the growth of health care spending.

But here is the real shocker: a new report by Andy Rettenmaier and his colleagues shows that both the trustees and the Congressional Budget Office assume future health care spending well below the actual path we are on! More about that next week.

Comments (7)

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  1. joe S. says:

    The good news is that Obama says he wants to do something about this. The bad news is that the majority of the members of his party in Congress want to do nothing about it.

  2. Don Levit says:

    Thanks for writing this interesting article.
    I found of particular interest the graph showing general revenue transfers to Social Security and Medicare, as a percent of income tax revenues.
    One would think that FICA taxes are not included in this graph, because 100% of FICA taxes pay Social Security and Medicare beneficiaries.
    This is not what actuall;y occurs, though.
    From my research, the FICA taxes go into the General Fund of the Treasury, the same fund in which the general revenue transfers are made.
    If Social Security and Medicare are 40% of the budget, wouldn’t it be fair to say that only 40% of FICA taxes go to current beneficiaries?
    The other 60% go to other governmental expenses, such as defense, etc.?
    Thus, the transfers from the Treasury’s General Fund, in reality, are a lot higher than this graph shows.
    What do you guys think?
    Don Levit

  3. Ken says:

    Why are people on the left so enamored with Ponzi schemes. I have heard that quite a few liberal foundations lost huge sums of money with Bernie Madoff. Maybe there is poetic justice in that.

  4. John Seater says:


    The Left is enamored with Ponzi schemes because the Left is the party of the short run. The Left *never* considers the long-run implications of their schemes, whether of the spending, tax, or regulatory variety. The essence of a Ponzi game is to focus on the short run and to pretend that the temporary good times can go on forever, as if the long run day of reckoning never will arrive. Unfortunately, the resource constraint guarantees that the day of reckoning most assuredly will arrive.

  5. William G. Shipman says:


    Keep up the good work.

  6. Mark Kellen says:

    As a physician, I take refuge in the fact that those of us with savings will be able to at least get elective health care outside the US. The majority of Americans have no idea the amount of rationing that is about to hit them.

  7. John Goodman says:

    There is a very intersting article in The New York Times this morning about the orignal Charles Ponzi.