We can't retire worries about Social Security, Medicare

Posted: May 25, 2006 12:01 AM

Sometimes the biggest stories don't make the newspaper.

Earlier this month, the trustees of the Social Security and Medicare trust funds issued their annual report on the future of the programs -- to little fanfare. Yet the report merits large headlines. It's important. And it's grim.

The trustees report that the two programs have promised $37 trillion more in benefits than they can deliver. In years to come, these entitlements are set to eat up shocking amounts of tax income.

One of the trustees estimates that, unless we fix these programs now, more than a quarter of all federal income taxes in 2020 will be spent on Social Security and Medicare benefits. That's up from about 7 percent today, in addition to the more than $764 billion in payroll taxes in 2005, to fund the two programs. By 2030, roughly half of all income taxes would be needed to keep these two programs afloat.

The trustees also report that the Medicare Hospital Insurance Trust fund will run out of money by 2018, two years earlier than they projected just last year. Since we allowed 2005 to pass without doing anything, this means we've actually lost three years that could have been used to fix the program. That fact alone should spur lawmakers to act.

Unfortunately, the most recent attempt at reform made the problem worse. In 2003, lawmakers tacked an open-ended prescription-drug entitlement onto Medicare, an expansion the trustees say will cost $8 trillion over the next 75 years.

It's time for Congress and the administration to change Medicare from today's open-ended entitlement to a defined-contribution program, one that adjusts contributions for age, health costs and income.

None of that will be easy politically, of course. But if lawmakers won't do something now, they'll have to do something in five years, or in 2018 when Medicare goes into the red. And the sooner they act, the more choices they'll have.

Social Security presents a similar problem.

The trustees report that program will continue to collect more in taxes each year than it will spend on benefits until 2017. But at that point, it will become a major drain on the Treasury, because it will start redeeming the special government bonds in the Social Security trust fund. Because there's no actual cash in that trust fund, the government will have to use general revenues -- such as income taxes -- to pay those benefits.

The crunch, in fact, will hit earlier than that. Around 2009, the roughly $100 billion annual Social Security surpluses, a cash cushion Congress has been spending on other programs, will begin to shrink. By 2017, those surpluses will be gone for good.

Think of the trust fund kid who spends his parents' money on frivolous things until the fund eventually dries up. That's the prospect facing the federal government within about 15 years, when today's annual Social Security surplus will turn into a $100 billion annual deficit -- a $200 billion reversal.

To head off the problem, lawmakers should allow workers to start saving money in Social Security personal retirement accounts that they would own and control. This would let younger workers build a nest egg for their own retirement and wouldn't reduce the benefits already promised to Social Security recipients born before 1950.

Many predictions come with a caveat: Maybe they'll happen, maybe they won't. Hurricane season is like that. This year may bring another Katrina, or we may escape without a major storm making landfall. But one storm we know is coming is the shortfall in Social Security and Medicare. The only way to keep that story off the front pages in years to come is to fix the problems now. Time is running out.