Calculating an Economic Apocalypse

Sometimes you don't need a cute anecdote or bon mot in posting. Sometimes the numbers speak for themselves. So here's the latest–just out this afternoon–on the long-term financial condition of Social Security and Medicare:

1) In 2017, cash flow into Social Security will turn negative, and the IOU-filled trust fund will need to be tapped. Assuming those IOUs are made good, the trust fund will be exhausted by 2041 and benefits will need to be cut by 25 percent.

2) Social Security's unfunded obligation–the difference between the present values of Social Security inflows and outflows less the existing trust fund–equals $4.7 trillion over the next 75 years and $13.6 trillion indefinitely. So to make the system solvent on an ongoing basis, the combined payroll tax rate would have to be raised immediately by almost one third from 12.4 percent to about 15.9 percent, or benefits reduced immediately by 22 percent.

3) Although Medicare's annual costs were 3.1 percent of gross domestic product in 2006–or about 72 percent of Social Security's–they are projected to surpass Social Security expenditures in 2028 and exceed 11 percent of GDP in 2081. As the trustees put it:

"While both programs face demographic challenges, the impact is greater for Medicare because healthcare costs increase at older ages. Moreover, underlying healthcare costs per enrollee are projected to rise faster than the wages per worker on which payroll taxes and Social Security benefits are based."

My take: These numbers show two things to me. First, they again reveal the inability of the U.S. government and voters to make tough fiscal choices. Just limiting initial Social Security payment increases to inflation rather than to wage growth would solve the program's problem. But we can't even seem to do that, much less deal with healthcare, which is far more complex.

Second, these numbers show how important it is for the United States to boost productivity. That's what will make America wealthier in the long term and better able to deal with entitlement financing. "What can government do to boost productivity?" should be the first economic question every presidential candidate is asked, because no economic issue is more vital to our future.