Bartlett: Social Security's Real Problem

Bruce Bartlett writes:

On Friday, the trustees of the Social Security and Medicare systems issued their annual reports for 2011. Commentary on these reports always tends to dwell on the date when their trust funds become exhausted; in the case of Social Security it is 2036 and for Medicare it is 2024. But in truth, these figures are virtually devoid of meaning.

Benefits are not paid out of a trust fund filled with income-producing assets, like a private pension fund; benefits are paid out of tax revenues. The trust funds are merely accounting devices best thought of as budget authority. As the trust funds draw down their assets, general revenues — that is, tax revenues besides the payroll taxes earmarked for these programs — are injected into the trust funds to redeem bonds that had previously been placed there during years when revenue from the payroll tax exceeded costs.

Although there is often speculation that Social Security and Medicare benefits would have to be slashed to the level of payroll tax revenue on the day the trust funds are empty, this is simply nonsense. It would take Congress a matter of hours to change the law to allow explicit general revenue financing for these programs.

There is never going to be a day when Social Security checks are cut across the board because the Social Security trust fund became exhausted.

What really matters for the viability of both Social Security and Medicare is their aggregate costs relative to the economy’s ability to pay them. In this regard, it is best to look at spending as a share of the gross domestic product, especially in the long run. ...