No, Social Security and Medicare Aren’t Going “Bankrupt”

April 25, 2012 at 1:09 pm

Note: We’ve revised the graph in this post.

Some news media and policymakers have seriously misrepresented the findings of the 2012 Social Security and Medicare trustees’ reports.  The CBS Evening News reported, “Medicare will run out of money in 2024.  Social Security retirement benefits run out in 2035.”   The Republican Doctors’ Caucus says that Medicare is going “bankrupt.”

Such assertions are extremely misleading, as our new paper explains.

The trustees project that the combined Social Security retirement, survivors, and disability trust funds will be “exhausted” — in the technical sense of the term — in 2033 and Medicare’s Hospital Insurance (HI) trust fund in 2024.  (Social Security’s retirement and survivors’ trust fund, taken alone, will be exhausted in 2035.)  But this does not mean that Social Security and Medicare will have no more financial resources and cease to pay benefits on these dates, as “running out of money” or going “bankrupt” suggests.

Social Security and Medicare Aren’t Going Bankrupt

As the Social Security commissioner, Michael Astrue, told reporters Monday, “Please, please remember that exhaustion is an actuarial term of art, and it does not mean that there will be no money left to pay any benefits.  After 2033, even if Congress does nothing, there will still be sufficient assets (from payroll taxes) to pay about 75 percent of [retirement and survivors’] benefits.”  Similarly, when the Medicare HI trust fund becomes insolvent in 2024, payroll taxes and other revenues will still be sufficient to pay 87 percent of hospital insurance costs (see chart).

To be sure, policymakers should not stand by and let the Social Security or Medicare trust funds become depleted.

Although Social Security faces no imminent crisis, policymakers should act sooner rather than later to restore its long-term solvency so that they can phase in needed reforms.  Medicare faces greater long-term financial challenges, stemming from the aging of the population and the continued rise in costs throughout the U.S. health care system.  Congress will need to act, as it has done frequently in the past, to keep spending and resources in balance — as well as to pursue policies to slow health care costs as we learn more about how to do so without sacrificing health care quality.  The health reform law creates a number of pilot projects that should help in this area.

But the public should not panic, and policymakers should not be driven to adopt radical proposals that would undermine the fundamental nature of these programs, by false claims that the programs are on the verge of “bankruptcy.”

Print Friendly

More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio | Blog Archive | Research archive at CBPP.org

6 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. American #
    1

    About three-quarters of the money that’s collected in Social Security taxes goes right out the door again in the form of benefits to Social Security recipients. The surplus that isn’t needed to pay benefits is loaned to the federal government to pay for other programs.

    Now what they take from the social security fund (e.g. the Old-Age and Survivors Insurance and Disability Insurance Trust Funds), is accounted for as an IOU in the form of special-issue, interest-paying Treasury bonds. The interest isn’t paid in cash, however; the Treasury issues the fund additional bonds for the interest amount.

    Basically they rob 1/4 of the fund each year and then replace it with an IOU in the form of a T-bond. Then they take the interest on the bond and replace it with another IOU in the form of a T-bond.

    The point to remember here friends is that BOTH parties have been doing this since 1983. This was originally a decision made by the Reagan administration and there have been more Republican administrations doing this than Democrat ones (though they got their beak wet in taxpayer SS surplus money just like the Republicans).

    Social Security WILL begin paying out more than it takes in. For the first time, it will have to use the interest being paid on the securities it holds in order to meet its obligations.

    If the politicians of BOTH parties hadn’t robbed the fund to pay for their nonsense, it would be a cash cow right now.

  2. Don #
    2

    The Social Security Trust Fund is a fraud and Social Security is already bankrupt, unless you believe that an entity which takes in less than it pays out every month is financially sound. Congress spent the extra SSI tax money and put junk bonds in a drawer. These IOUs have no real value and are nothing more than a promise to tax future citizens. Today, SSI taxes do not cover SSI payments so extra money is taken out of general revenue to make up the shortage. What difference does it make if the drawer is full of dusty IOUs or just dust? I refuse to believe that Mr. Van de Water does not know this.

    • 3

      As I’ve explained at length elsewhere (http://www.cbpp.org/cms/index.cfm?fa=view&id=3299), claims that the trust funds are “just IOUs” reflect a basic misunderstanding of how the trust funds work.

      All financial assets are “just IOUs.” Money that the federal government borrows from the public or from Social Security is used to finance the ongoing operations of the government in the same way that money deposited in a bank is used to finance spending by consumers and businesses. The bank depositor will get his or her money back when needed, and so will the Social Security and Medicare trust funds.

      • I can't believe this #
        4

        “The bank depositor will get his or her money back when needed, and so will the Social Security and Medicare trust funds.”

        Not if there isn’t any money to get back. Those ‘assets’ the trust fund has are intergovernmental debentures that do not have any market value nor doet the holder of it have any legal recourse to get Congress to cough it up, either.
        Ever hear of ‘mark-to’market’ valuation? Well, you are engaging in ‘mark-to-fantasy’, I am afraid.

        When a bank can’t convert its assets (loans) into enough cash on demand and can not do it chronically, the result is called a bank run. With the trust funds, ultimately the money has to be coughed up by the taxpayers. And we obviously can not do that…the liability is just too large both mathematically as well as politically.

        Insolvency is insolvency, no matter how you pretty it up.

        • Lenny Moore #
          5

          Paul,

          Thanks for trying to clarify this important topic for the electorate. A democracy to function well is dependent on informed citizens. Unfortunately, the nature of our government and the associated issues it faces have either grown beyond the intelligence of most or their willingness to invest the time to understand them. The issue of the solvency of the Social Security and Medicare trust funds is such an issue. Politicians are trying to exploit the public’s ignorance on this to balance the budget on the backs of the middle-class. Just like a corporation is an entity created by law and exist only on paper as a separate legal entity, so do the trust funds. But, just because it is the law that establishes them doesn’t mean they are not real. Accordingly, the fact that the law restricts them to invest in U.S. treasuries, doesn’t mean that the separate trust funds do not have on their balance sheets investments in U.S. treasuries just like any corporation who did so would.

      • jim #
        6

        Paul, it just won’t do any good to try to explain yet again. If someone feels the earth is flat, no amount of video from the space station will disabuse them of that notion. They know what they want to believe, and that’s that.



Your Comment

Comment Policy:

Thank you for joining the conversation about important policy issues. Comments are limited to 1,500 characters and are subject to approval and moderation. We reserve the right to remove comments that:

  • are injurious, defamatory, profane, off-topic or inappropriate;
  • contain personal attacks or racist, sexist, homophobic, or other slurs;
  • solicit and/or advertise for personal blogs and websites or to sell products or services;
  • may infringe the copyright or intellectual property rights of others or other applicable laws or regulations; or
  • are otherwise inconsistent with the goals of this blog.

Posted comments do not necessarily represent the views of the CBPP and do not constitute official endorsement by CBPP. Please note that comments will be approved during the Center's business hours. If you have questions, please contact communications@cbpp.org.




8 − = four

 characters available