Wednesday, April 27, 2005

Social Security Economics

Bruce Bartlett explains how the concept of present value can help us understand the financial implications of both Social Security and Medicare .
In short, we would need about one year's gross domestic product in a bond fund somewhere, backed by productive tangible asserts earning a real return, in order to pay all of Social Security's promises without either raising taxes or cutting benefits.
Imagine setting aside this year's entire GDP in productive assets so that over the life of Social Security, as the Trustees currently project that program, we could pay for the choice today of continuing the program's status quo.

As bad as this news is, however, it pales in comparison to Medicare's problems. . . .Adding up all of Medicare's unfunded costs yields a total of $68.1 trillion -- six times Social Security's unfunded liability . . . .
Let's see, I think that means Social Security and Medicare combined would require us to have set aside 7 years of GDP in productive assets to be able to pay for these programs' status quo.

The chilling conclusion is that virtually 100 percent of all federal taxes, on a present value basis, do nothing but pay for Social Security and Medicare. Unless there are plans to abolish the rest of the federal government, large tax increases are inevitable.

You may be tired of seeing posts on social security, but I think it is indeed chilling that today's political discussion seems to be favoring the status quo.

1 comment:

Anonymous said...

In Sunday's Colorado Springs Gazette, Prof Loevy of Colorado College has a review of the Social Security proposed changes and some implications of private accounts. Unfortunately, the Gazette takes its paper down from the website ( after one day, and access is limited to subscribers thereafter.
He discusses the potential impact of large numbers of private accounts with retirement dollars in them and the potential effect on the financial markets.