Another annual report is out from the Social Security and Medicare trustees. Which means it is the solemn duty of every economics columnist to acquaint their readers with some frightening numbers.
Thanks to the Great Recession, the taxes paid into the Social Security program began to exceed the money flowing out in 2010. But that is a permanent condition, not a recession-only shortfall; until taxes are raised or benefits are cut, the system will never return to balance. As more baby boomers retire, starting in 2022 we will begin to empty out the “trust fund,” which is supposed to buffer this imbalance. In 2034, it will be exhausted; under current law, benefits will then be slashed by 23 percent.
Medicare is in even more parlous shape; the Hospital Insurance Trust Fund will be emptied by 2026, three years earlier than was projected just last year. And that assumes that health-care cost growth remains moderate. If Medicare is unable to hold payments down as projected, that date could advance even further.
Yet none of this is exactly news; for years we columnists have been reading approximately the same reports and painting approximately the same picture with the depressing regularity of an annual trip to the dentist. America has made large promises to our retirees, but has not provided adequate revenue streams to make good on them. And, eventually, at least one of those two things will have to change.
All that’s really new is the date on our calendars: Once again, we have marched one year closer to fiscal catastrophe. Almost 20 years ago, when I first began writing about this, the dates of trust-fund depletion felt comfortably far off; the hypothetical disaster only marginally more real and pressing than a scenario in some apocalyptic novel. Now we are as close to the day of depletion as we are to the day when I penned my first warning about it. The crisis is no longer peeking over a distant horizon but looks unfortunately tangible, and uncomfortably close.
Just as with saving for our personal retirement, the most painless approach to sustainable entitlements is to start early and make small adjustments, rather than trying to frantically close the gap during the past few years. We could easily have done this, for the solution has always been obvious: a combination of raising the retirement age and raising the payroll taxes, with the changes phased in slowly to give people plenty of time to adjust their expectations.
We didn’t do that when it would have been easiest 20 years ago; we aren’t doing it now, when the necessary changes will be larger and harder. And, unfortunately, it’s hard to see how we will do it until the trust funds are down to the last penny and massive cuts to benefits are looming over the heads of frightened retirees.
The math of fixing our entitlement programs has always been easy, but the politics have always been difficult. The long time horizons over which such problems unfold, and over which solutions are best implemented, are ill-suited to the exigencies of the American political calendar. The political bases of the two major parties want something right now — a gargantuan tax cut, perhaps, or a massive new health-care entitlement that must be paid for by using Medicare payment reforms that could otherwise have shored up the finances of the existing program. Politicians facing a choice between giving the base what it wants, or giving the base higher payroll taxes and later retirement ages just to keep something they already have, unsurprisingly chose the easy path to fiscal meltdown, rather than the rocky road to sanity.
But if the politics of entitlement reform were bad before, they seem hopeless now. The necessary reforms necessarily have to be bipartisan; any party that tried to force this unpleasant fiscal medicine on the American public by themselves would be committing electoral suicide. Given the bitter rancor gripping the country, it’s hard to see either party agreeing to hold hands and jump together.
Which means that all too soon, the crisis will be upon us. It’s hard to say exactly when it will arrive, though it’s unlikely to be those headline dates. Even two parties that hate everything about the other guys can undoubtedly find a way to agree on some kind of quick fix that keeps Medicare payments flowing and Social Security checks going out, probably by borrowing a great deal of money from the debt markets.
But it’s unlikely, in our current environment, that they’ll be able to craft the kind of deep reforms that could keep these programs stable, and sustainable. So entitlements, and rising interest payments, will put more and more pressure on the rest of the budget: less money for other priorities, even more flagrant deficits. Eventually that pressure will become unendurable, forcing a rapid and unpleasant adjustment to bring outflow and inflow back in line.
If this seems like a daft way to handle a serious problem, that’s because it is. And yet, it’s getting very hard to envision any other possible ending. We let our finances run out of control thanks to an optical illusion. And all the evidence suggests that we’re planning to cling to that illusion until the veil is forcibly ripped from before our eyes.