Audio By Carbonatix

Politicians in both parties have behaved as if old-age entitlement programs are infinitely sustainable and require no cost to maintain. The latest accounting of the trust funds for Social Security and Medicare tells a different story.

Trustees of both programs released their annual reports last week on the state of the funds that finance retirement benefits under Social Security and Part A of Medicare, which covers seniors’ hospital bills. They have only bad news. Social Security’s trust fund is set to run out of money by 2032. Medicare’s insolvency is expected just a year later.

To be sure, the programs’ trust funds are essentially an accounting fiction rather than an actual savings account from which they can draw on. During the past century, when the programs were taking in more in payroll taxes than they were paying out in benefits, the resulting surpluses were used for other government spending. The money that was used for general spending was considered to be “owed” to Medicare and Social Security — hence the trust fund convention. However, in recent decades, the programs have been bleeding more in benefits than they have been taking in, dwindling the trust funds. The trust fund has always been a mirage — a vehicle for the government to borrow from one pocket to give to another.

While at the end of the day the trust fund is thus just an accounting quirk, there is a practical implication of the trust funds’ becoming exhausted. Once insolvent, current law prevents the programs from paying benefits beyond what is taken in from payroll taxes. This will mean sudden and significant cuts for seniors. Absent action from Congress, Social Security recipients would see their benefits slashed instantly by 22 percent across the board.

Congress almost certainly wouldn’t accept this outcome. If lawmakers want to avert these cuts, they could, in theory, amend the law to continue to pay out promised benefits in excess of payroll tax collections. Yet that would represent a significant change in the promise of Social Security, which is more popular than other government programs because it is perceived as a system in which seniors get out what they put in while working, rather than as a typical welfare program. (Even though, in reality, young workers are paying for current retirees, who often receive more than what they contributed during their working years.) As the trust fund balance becomes exhausted, lawmakers could also buy some time with various accounting gimmicks to get around the technical requirement (for instance, raising payroll taxes and then providing an offsetting credit against income taxes).

However, neither of these changes would do anything to make the program more sustainable for future generations of Americans. Achieving actual solvency would require changes to benefits, as simply taxing the rich won’t close such an enormous gap.

The true entitlement crisis, therefore, is not the looming trust fund insolvency of Social Security and Medicare. It is the enormous public debt resulting from both programs that is already drawing from our resources and that will only become more explicit once their trust funds are exhausted. Long-term fiscal deficits are driven almost entirely by projected shortfalls in these two programs. At a certain point, financial markets will balk at buying further debt, forcing lawmakers with painful trade-offs among which would be high inflation, excessive interest rates, and/or austere fiscal policies that would crush the economy. Otherwise, the government will have to default on its debt, either explicitly by failing to make bond payments or implicitly through printing lots more money.

If lawmakers wait around until the trust funds are exhausted or, worse, for a fiscal emergency, they will have to make rash decisions with harsh and immediate consequences. It would be much more sensible to enact changes now (such as raising the retirement age and making future benefits grow more slowly), which could be implemented much more gradually, than to govern from a crisis mindset. It would have been far easier one or two decades ago, but better late than never.