In short, we would need about one year's gross domestic product in a bond fund somewhere, backed by productive tangible assets earning a real return, in order to pay all of Social Security's promises without either raising taxes or cutting benefits.
As bad as this news is, however, it pales in comparison to Medicare's problems. According to its trustees, Part A, which pays for hospital care, has an unfunded liability of $9.4 trillion for current participants and $14.7 trillion for future participants, for a total of $24.1 trillion (Table III.B11).
Medicare Part B, which pays for doctors' visits, will require $25.8 trillion in funds from taxpayers to pay for promised benefits over and above the modest premiums that retirees pay (Table III.C15). And the newly enacted Medicare Part D, which pays for prescription drugs, will need $18.2 trillion from taxpayers on top of beneficiary premiums and state transfers (Table III.C21).
Adding up all of Medicare's unfunded costs yields a total of $68.1 trillion -- six times Social Security's unfunded liability, which President Bush says is in crisis and requires immediate action to repair. Indeed, the drug benefit alone, which he rammed through Congress two years ago, has a liability $7.1 trillion greater than Social Security. This suggests that we could repeal the drug benefit, fund Social Security forever with no tax increases or benefit cuts and still cut $7.1 trillion off our national indebtedness.
To make these very large numbers somewhat more concrete, Social Security's unfunded liability comes to 1.2 percent of GDP in perpetuity (1.4 percent without the trust fund) -- about what is currently raised by the corporate income tax. The comparable number for Medicare is 7.1 percent -- about what is raised by the individual income tax. And remember that these figures are for the unfunded portion of these programs, so they are over and above payroll taxes.
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.
Avoiding such tax increases is the best reason to reform Social Security now. It's too bad that President Bush made the Medicare problem so much worse before trying to fix Social Security.
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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