RPC Must Read June 7, 2011

 

Washington’s Cost to Taxpayers

 

If the United States fails to act soon in reforming our major entitlement programs, there is a real possibility the nation will be unable to fulfill its obligations.  The article below outlines the amount of money owed for these entitlements, and what the obligation is on a per household basis.

 

Government’s Mountain of Debt

 

USA Today

By Dennis Cauchon

 

Medicare: $24.8 trillion

Obligation per household: $212,500

 

The health insurance program for seniors is the nation's biggest financial challenge.

 

The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20.

 

This demographic burst — combined with the addition of a prescription drug benefit in 2006 and rising health care costs generally — has created an unfunded liability of nearly $25 trillion over the lifetime of those now in the program as workers and retirees. That is the taxpayers' obligation, beyond what Medicare taxes will bring in or seniors will pay in premiums for Medicare Part B — also called supplemental coverage — that helps pay for doctor visits and other expenses outside the hospital.

 

That $25 trillion is likely an underestimate, Medicare's actuaries say, because it counts on 165 cost-saving changes in the health care reform law. Many of these are unlikely to occur — such as cutting physician payments 30% by 2012.

 

Even with savings, Medicare's financial hole grew $1.8 trillion last year, more than the federal deficit. One bit of good news: The prescription drug benefit is now projected to be underfunded by $5.3 trillion, less than the original projection in 2005 of $6.7 trillion. Reason: smaller drug price increase and increased use of cheaper generic drugs.

 

Republicans and Democrats have different approaches to saving Medicare's finances. House Budget Committee Chairman Paul Ryan, R-Wis., has proposed giving seniors a fixed amount to subsidize the purchase of private health insurance. President Obama and other Democrats propose better management, smarter treatment choices and other strategies to bring U.S. health care costs in line with what other industrialized countries spend.

 

Spending on Medicare is set to increase from $523 billion last year to $676 billion in 2015 and $861 billion in 2020.

 

Social Security: $21.4 trillion

Obligation per household: $183,400

 

Social Security faces the same demographic challenges as Medicare: a rapidly aging population and increased longevity.

 

Social Security's long-term shortfall grows about $1.2 trillion annually — a sign of an imbalance between the number of young workers and older beneficiaries, according to the Social Security trustees' annual reports. The $21.4 trillion unfunded liability represents the difference between all taxes that will be paid and all benefits received over the lifetimes of everyone in the system now — workers and beneficiaries alike. This is the measure corporations and insurance companies use to assess financial adequacy of their retirement programs.

 

The number differs from the $6.5 trillion, 75-year shortfall that Congress uses to assess Social Security's health. Congress's 75-year figure is smaller because it counts taxes collected from future workers — those toiling from 2050 to 2085, for example — but doesn't count the benefits they will get in the 76th year and beyond.

 

In addition, Congress reduces its estimate of Social Security's shortfall by counting the $2.6 trillion in IOUs the government has issued to the program's trust fund. However, the government's audited books, issued by the Treasury Department, don't count that money as having any value to the federal government because it is a debt the government has issued to itself — like paying off a car loan with a credit card.

 

Social Security's cost will soar more quickly than Medicare because its early retirement age is 62 rather than 65. Social Security's cost will grow from $712 billion in 2010 to $911 billion in 2015 and $1.2 trillion in 2020, according to the program's actuaries.

 

President Obama's debt reduction commission recommended raising the early retirement age to 64 over 75 years, trimming benefits to affluent seniors and reducing annual cost-of-living increases. In the past, President George W. Bush and other Republicans have proposed converting part of Social Security to personal retirement accounts, similar to 401(k)s. President Obama and other Democrats have suggested applying the Social Security tax to salaries above the current limit of $106,800.

 

Federal debt: $9.4 trillion

Obligation per household: $79,900

 

The federal debt is growing so fast that each household owes $3,500 more today than at the start of the year when the debt clocked in at an average of $79,900 per household.

 

The federal government's $9.3 trillion in debt on Jan. 1 (and $9.7 trillion today) is what it owes the public from the Treasury Department's sales of short-term bills, medium-length notes and long-term bonds. It includes all debt owed to U.S. investors, money market funds, the central banks of China and Japan, private banks in Europe and others.

 

It does not include the $4.6 trillion in IOUs the federal government has promised its own programs such as Social Security and federal employee pensions. The effect on taxpayers is the same no matter where the debt lands — on the books of Social Security or Treasury Department.

 

The federal debt limit Congress and the White House are debating includes both — the debt held by the public plus the internal loans to federal programs, for a total of about $14.5 trillion.

 

Military retirement/disability benefits: $3.6 trillion

Obligation per household: $31,200

 

The wars in Iraq and Afghanistan have contributed to a 46% increase since 2004 in the cost of pension, medical care and disablity benefits for former service members.

 

Biggest jump: a 71% increase since 2004, to $1.3 trillion, in the cost of future pension checks to retired military personnel. The funding shortfall for the disability program rose to $1.5 trillion, up 54% since 2004, and to $900 billion for retiree health care, up 32%.

 

These numbers reflect the liability of those programs in today's dollars. Actual spending will be much higher over the years.

 

Federal employee retirement benefits: $2 trillion

Obligation per household: $24,000

 

The federal government makes its pension fund contributions with IOUs. Unlike private and state pensions, the federal government does not have a stash of stocks, bonds and other assets to pay future costs. Civil servant retirements will be financed by taxes or borrowing.

 

The unfunded liability for federal pensions is $1.6 trillion, plus another $400 billion for retiree health care. The federal government employs about 2 million people, excluding the military and postal service.

 

State, local government obligations: $5.2 trillion

Obligation per household: $44,800

 

States, cities and school districts are on the hook for at least $5 trillion, half of it debt. Most of the rest is about $900 billion in pension shortfalls and $1 trillion in promises made to pay medical costs for retired workers.

 

The unfunded liability for retiree health insurance varies widely — nothing for the state of Nebraska, $1.3 billion for the city of Buffalo — depending on what elected officials have promised employees.

 

 

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