The piggy bank is empty

US Medicare and Social Security will run out of money even sooner than expected because of the recession, according to the Obama administration. Medicare, which pays hospital bills for older Americans is expected to run out of money in 2017, two years sooner than projected last year. The Social Security trust fund will be exhausted in 2037, four years earlier than predicted.

Spending on Social Security and Medicare exceeded US$1 trillion last year --more than one-third of the federal budget. This puts the US government in a bind. Its dependency ratio is growing – the proportion of the population which is supported by workers – because of the elderly are increasing and the workers are decreasing. It cannot count on rising numbers of taxpayers. Hence the only options are to cut costs, slash benefits, or raise taxes. All of these options are extremely difficult politically and economically.

And the problem could be worse than the government says. According to the blog of respected financial analyst Harry Dent, Medicare and Social Security have no money:

Currently, the two programs take in more money through taxes than they pay out in benefits. But those surpluses do not go into a giant national piggy bank. No, a more apt metaphor would be that of a pig trough, with Congress as the pigs. The surpluses are "borrowed" by the government and replaced with Treasury bonds. This means that the government is borrowing from itself. More accurately, it is borrowing from its future retirees.

This means that the entire concept of the trust fund is an accounting fiction at best and outright fraud at worst. Recent estimates had the Social Security surpluses turning to deficits by around 2014, and perhaps sooner due to the effects of this recession. This means that in less than 5 years, the Social Security Administration will be "calling in" its government IOUs. Unable borrow from itself (and now actually having to pay itself back), the government will have to turn increasingly to the public markets…and to higher taxes. And with a flood of new public debt, do you really think interest rates on government bonds can remain at their current low levels? More debt at higher rates will be an unmitigated disaster.

Bottom line: if you think the Federal deficits are bad now, just wait until the illusion of the trust fund disappears. It’s going to get a LOT worse.


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