Tuesday, September 16, 2008

New article: The Aging Couple

Melinda Beeuwkes Buntin and Susann Rohwedder of the RAND Corporation are authors of a new article on Social Security and Medicare – the "aging couple."

The plight of the Social Security trust fund is well known. Outflows are projected to exceed inflows beginning in 2017; without corrective action, the trust fund will be depleted by 2041. But the Medicare trust fund is in worse shape: Outflows will begin to exceed inflows this year, and projections indicate that it will be exhausted by 2019 (see the figure).

More worrisome still, these projections may actually understate the extent of Medicare's funding problems. Health care costs have historically grown faster and less predictably than general inflation. This means that the Medicare trust fund could expire even sooner than most economists are projecting and that modest adjustments to taxes or benefits won't bring the fund into balance.

What has brought on this double-barreled funding crisis? Two factors stand out. First, Americans are living longer. Men reaching retirement at age 65 today typically look forward to a further 17 years of retirement, compared with fewer than 13 years back in 1965. The result is that retirees are receiving Social Security and Medicare benefits for far longer than the designers of the program ever envisioned. But more important, the cost of health care has increased rapidly, thanks largely to the pace of technological innovation.

Social Security and Medicare's looming budget shortfalls pose real problems. But any problem caused by longer lives and medical breakthroughs must be approached cautiously. Social Security and Medicare's financial problems are real, but so are their achievements: historic reductions in poverty among seniors, greater longevity, and the provision of cutting-edge medical technology to seniors. The challenge for policymakers is to address the two programs' financial problems while building on these gains.

Click here to read the full article.


Arne said...

"Outflows are projected to exceed inflows beginning in 2017"

Given that interest on the TF is credited to the TF, this is a false statement is it not?

Andrew G. Biggs said...

In general the two primary references are to 'cash' flows -- simply tax income and benefit outgo -- and then to total assets, which include the trust fund. So I think this is fair enough from the common perspective.

Moreover (and this is getting pretty technical about it), interest on the trust fund isn't paid in cash but in additional bonds. To obtain cash, those bonds have to be redeemed. So I think the distinction between cash flows (2017) and trust fund exhaustion (2041) is a decent one. I never though the date at which we'd have to start redeeming the principal in the TF was particularly important, but others differ on that.