Let's Give The Government A Big Thanks - NOT!

By MARTIN CRUTSINGER, AP Economics Writer
45 minutes ago

WASHINGTON - Trustees for the government's two biggest benefit programs warned Tuesday that Social Security and Medicare are facing "enormous challenges" with the threat to Medicare's solvency far more severe.

The trustees, issuing a once-a-year analysis of the government's two biggest benefit programs, said the resources in the Social Security trust fund will be depleted by 2041. The reserves in the Medicare trust fund that pays hospital benefits were projected to be wiped out by 2019.

Both those dates were the same as in last year's report. But the trustees warned that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes. For Medicare, that threshhold is projected to be reached this year and for Social Security it is projected to occur in 2017.

The first year that payments will exceed income for Social Security will occur in 2017, just nine years from now, reflecting growing demands from the retirement of 78 million baby boomers. Medicare is projected to pay out more than it receives in income starting this year.

"The financial difficulties facing Social Security and Medicare pose enormous challenges," the trustees said in their report. "The sooner these challenges are addressed, the more varied and less disruptive their solutions can be."

Treasury Secretary Henry Paulson, one of the trustees, warned that the country was facing a fiscal train wreck unless something is done.

"Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," Paulson said in releasing the new report. "Our nation needs a bipartisan effort to strengthen both programs for future retirees."

President Bush, who wanted to make overhauling Social Security his top domestic priority in his second term, tapped Paulson to lead that effort. However, Paulson has been unable to forge a consensus with Democrats, who took control of Congress in 2006.

Democrats contend that Bush lost valuable time after his 2004 re-election pushing a plan to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress.

While the Social Security trust fund will have resources until 2041, the more critical date in terms of government revenues will occur in 2017. That is the date that Social Security will have to pay out more in benefits than it collects in payroll taxes. At present, Social Security is running large surpluses that are going to fund the rest of government.

However, in 2017, the situation will be reversed and the government will have to start filling the gap between what Social Security will be collecting in payroll taxes and what it must pay out. Technically, it will do that by redeeming the non-marketable Treasury securities that are held in the trust fund. However, those bonds are simply government IOUs.

To get the money to pay the benefits, the government will have to borrow or close the gap in other ways such as cutting benefits or raising taxes