America's Social Security and Medicare systems may need expensive repairs.
A new report on Social Security and Medicare finds that the system is now paying out more than it brought in, forcing the system to dip into its $3 trillion pool of reserves for the first time since 1982.
Overall, it suggests that taxes to fund systems for retired or disabled Americans either have to go up, or benefits have to eventually be cut. Today, there are 62 million people in the Social Security System, a number that'll jump to 90 million by 2040. And by then, there will be fewer workers supporting those beneficiaries.
However, in a statement, Treasury Secretary Steven Mnuchin said "the administration’s economic agenda — tax cuts, regulatory reform, and improved trade agreements — will generate the long-term growth needed to help secure these programs and lead them to a more stable path."
But Laurence Kotlikoff, an economics professor at Boston University who is deeply concerned about the Social Security system, says it's magical thinking when trustees use an accounting system that chooses to ignore what happens beyond 75 years from now. That may sound like a "Star Trek" star date, but there are kids alive today who will need the system beyond that time horizon.
Kotlikoff specifically points toward the end of the trustees report (Table VI.F1 in the appendix, page 200) where he sees the “real” accounting acknowledged. In his reading, it's not pretty. He joined us to talk about the issues he sees with our Social Security System and what he sees as faulty reasoning from Mnuchin. Below are some of his edited responses to our questions.
So where did they go wrong here? I mean, we knew the American population was aging, yet their calculation was off here. You notice that there is an acknowledgment that there's a different way to calculate this where it doesn't cut off at 75 years from now. And when you see that, what is the suggestion to you?
That we're in a far worse shape than the news reports are stating. The beginning of the document is advertising that the trustees are not doing their work. They're hiding in this document, way in the appendix, the truth about that the system is in far worse shape than they were talking about at the beginning of their document. The trustees are saying that in 2034, the trust fund will run out of money. And at that point, we need a 21 percent immediate cut, and permanent cut, in all the benefits being paid by Social Security, including disability benefits. But if you look at that table VI.F1, it's saying something very different. It's saying we need a 24 percent cut not starting in 2034, but starting today.
Now the treasury secretary, Steven Mnuchin, says that the Republican-led tax cuts and economic growth is going to help the situation, if not fix the situation. What do you think about that?
Well, I think it will help somewhat, but he needs to realize that the benefits are also connected to the growth. So if there's more wage growth, there's gonna be higher benefits as well. Now what the trustees report is saying is that despite the tax reform, that's no salvation — that the system is in just horrendous shape. The system ran a $1 trillion deficit last year. It's unfunded liability, a shortfall. So Mnuchin could use a little lesson in my classroom in front of the white board. I'd love to have him there for about an hour, just tie him down and make him actually learn some economics.
Now this isn't just a Trump administration thing — with many administrations, their vision gets a little hazy when looking into the future when it comes to Social Security and Medicare.
Oh yeah, this goes back with every administration — the Obama administration. This is an ongoing, generational expropriation game. It's a Ponzi scheme. We're taking from the young and giving to the old — it's a take-as-you-go. It's been called a pay-as-you-go system, but it's really a take-as-you-go. Each generation is being told, "Look, hand us over money. We're going to call it taxes rather than borrowing, but ... we're going to use that money to pay off the current elderly. But we're going to promise you even more benefits when you get older." And guess what, when you're older, we're going to go and expropriate your kids to pay you. So you'll have your chance at expropriating your kids. That's the basic story behind not just Social Security, but Medicare, Medicaid, defense spending. The entire fiscal operation in the post-war starting with Eisenhower on — Carter, Kennedy, Johnson — it's all take as you go. And that's why the country is really in terrible fiscal shape. It's probably in the worst fiscal shape of any developed country when you do the analysis correctly.