Q&A of the Day – Aren’t Social Security & Medicare Supposed to Be Trust Funds?
Each day I feature a listener question sent by one of these methods.
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Today’s Entry: Submitted via talkback regarding Social Security and Medicare’s looming insolvency given that they’re supposed to be “trust funds”
Bottom Line: If anything constructive has come out of the recent effort by political opportunists to spin Florida Senator Rick Scott’s position on Medicare and Social Security, it’s the awareness that we have very real problems looming in these programs. For years I’ve likened the looming Medicare and Social Security insolvencies to the scene in the first Austin Powers movie where a character can see a slow-moving steam roller coming straight at him but doesn’t move. Opting instead for standing in place and screaming until it’s too late. Yes, we’ve been told that these two entitlements which we pay into all throughout our working lives are trust funds. Yes, we’ve been lied to right along. As Senator Scott has highlighted within his Rescue America Plan, he seeks to: Force Congress to issue a report every year telling the public what they plan to do when Social Security and Medicare go bankrupt. Simply highlighting the looming issues has made Scott a target of those happy with the status quo. After all, it’s easier for politicians to do nothing until they’re forced to, that said the reality on the ground in these important programs ain’t pretty. As I mentioned in my takeaways on Friday... On the Social Security Administration's website, they currently have this disclosure: The concepts of solvency, sustainability, and budget impact are common in discussions of Social Security, but are not well understood. Currently, the Social Security Board of Trustees projects program cost to rise by 2035 so that taxes will be enough to pay for only 75 percent of scheduled benefits. If we do nothing Social Security is insolvent in 12 years. And as for Medicare, in their annual report, it’s worse. Part A, guess when they say that implodes? Five years. Yes, five years. So how can this be the case given that in theory these are trust fund programs?
The Social Security Administration nor Medicare places money in an account accruing interest with your name on it until you're ready to collect. That’s just the way it’s commonly presented politically to us. Everything with these programs changed in 1968. That year, Democrat President Lyndon Johnson and a Democrat controlled congress, reclassified Social Security and Medicare funds to be included in the annual federal budget as opposed to being standalone trust fund programs as they’d been established originally. Once added to the federal budgeting process the funds in these programs were leveraged and borrowed against by politicians during the general budgeting process. In the mid 80’s, President Reagan spearheaded an effort to reverse this. Congress didn’t comply, but in 1990 President Bush was successful in decoupling the programs from the general funds in the budgeting process. However, what was kept was the mandatory funding of our debt spending with it.
Social Security specifically is mandated under law to be “invested” in special issue government bonds, which allow for increased debt spending by the federal government. It’s a way to essentially accomplish the leveraging of the funds without having them specifically available within the general budgeting process. Due to the program is a series of IOUs as opposed to a trust fund. Current benefits are paid by those currently working which is where the looming shortfalls come from. At the point where the active workforce is outdone by those collecting benefits, the jig is up. As I’ve said for years when discussing Social Security, if it weren't a government program it'd be ID'd as a Ponzi scheme. Medicare is a slightly different version of a similar thing with funds used to buy new government issued bonds and current taxes going to pay existing needs. The fixes aren't easy, but it's also not complicated. Social Security should be paid into an account, in your name, that can't be taken away from you that grows overtime until collected. That would require significant reform and political courage. The kind of courage that Senator Scott has but that few around him do. One of the first and biggest challenges is educating the public on what they’ve done which requires being honest about the fact that their Social Security dollars are paying for our country’s outrageous debt spending – which is one of the main reasons there’s a general lack of political will to get serious about this. But they will be forced to one way or another sooner than later with Medicare insolvency looming in five or so years.