A key reason why we have a problem with entitlement programs like Social Security is that they were enacted with insufficient regard to their long-term finances. For example, the only concern Congress had about the recently enacted Medicare drug benefit was whether it would cost less than $400 billion in the first 10 years. The period afterward was almost completely ignored in congressional debate.
This myopia makes it too easy to enact new programs that cost little in the short run but are massively expensive in the long run. In the case of the drug benefit, the costs in the first two years were virtually nil and then it phases in for several more. It is only in the last years of the initial forecast period that the long-term spending trend becomes visible. At that point, the drug benefit will cost taxpayers more than $100 billion per year, according to the Congressional Budget Office.
Once a year, however, we get a look at the government's largest long-term financial liabilities when the trustees of the Social Security and Medicare systems issue their annual reports. The prose may be impenetrable, but it makes for interesting reading if one knows where to look.
Last year, the actuaries, who actually write the trustees reports, made an important methodological change. Historically, they had presented financial data for 75 years out. But some of the trustees felt that it would be more informative if perpetual costs could be summarized in present value terms. (A present value calculation takes account of the fact that $1 in the future is worth less than $1 today even with no inflation.) These figures have become the most revealing indicators of the true financial condition of our major entitlement programs.
Starting with Social Security, which President Bush repeatedly says is in precarious financial condition, we see that the present value of all future costs for that program less expected taxes in perpetuity is estimated at $13.7 trillion. The $1.7 trillion currently in the Social Security trust fund is treated as if it is a real asset, which lowers the unfunded liability to $12 trillion.
Since those who do not yet qualify for Social Security benefits will get back less than they will pay in present value terms, it lowers the long-term cost by another $900 billion, for a net unfunded liability of $11.1 trillion -- $12.8 trillion if you don't believe there are really any assets in the trust fund. (These data are in Table IV.B7.)
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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