What are we to make of yesterday's report from the trustees of the Social Security and Medicare trust funds that Social Security will run out of assets in 2037 -- four years sooner than previously forecast -- and that Medicare's hospital fund will be exhausted by 2017 -- two years earlier than predicted a year ago?
Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next 75 years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next 75 years.
Yes, I know, the postwar baby boom is moving through the population like a pig through a python. The number of retirees eligible for benefits will almost double from 40.5 million this year to 79.5 million in 2045. But we knew that the boomers were coming then, too. What we didn't know then was the surge in immigration. Yet immigrants are mostly young. Rather than being a drain on Social Security when the boomers need it, most immigrants will be contributing to the system during these years, which should take more of the pressure off.
Even if you assume Social Security is a problem, it's not a big problem. Raise the ceiling slightly on yearly wages subject to Social Security payroll taxes (now a bit over $100,000), and the problem vanishes under harsher assumptions than I'd use about the future. President Obama suggested this in the campaign and stirred up a hornet's nest because this solution apparently dips too deeply into the middle class. This made him backtrack and begin talking about raising additional Social Security payroll taxes on people earning over $250,000. Social Security would also be in safe shape if it were slightly more means tested, or if the retirement age were raised just a bit. The main point is that Social Security is a tiny problem, as these things go.
More about Medicare after the jump.
--Robert Reich
