April 01, 2023
I’m on the road (literally driving from southern Utah to western Oregon) but I thought I should quickly weigh in on the scare stories we heard yesterday after the release of the 2023 Social Security and Medicare Trustees Reports. I’ll make four quick points:
- The scare stories stem entirely from how we account for Social Security, as opposed to programs like education or the military;
- We’ve already seen most of the increased burden associated with the retirement of the baby boomers;
- It’s not true that our only choices are raising taxes or cutting benefits, as has been widely asserted;
- We have seen great news on Medicare since the passage of the Affordable Care Act, which has been largely ignored.
The Problem is Largely Accounting
Starting with the accounting, Social Security is a program we have decided to fund from dedicated taxes, primarily the 6.2 percent tax employers and employees pay on the first $160,200 of income. (Part of the program’s problem is that the share of wage income going over the cap, and avoiding taxation, rose from 10.0 percent in 1982 to almost 20 percent today. This is because of the huge upward redistribution of wage income over the last forty years.)
Most other items in the budget are not funded by a dedicated tax. If they were, we would have had many scary moments in the past and possibly in the future. For example, government spending on education increased from 1.3 percent in 1946 to a peak of 3.8 percent of GDP in 1970. This 2.5 percentage point increase in spending to accommodate the baby boomers’ needs when we were kids, is far larger than the 1.8 percentage point projected increase in spending in Social Security from 2000 to 2040, the peak pressure of the baby boomers’ retirement.
If we had funded education from a dedicated tax and were looking at accurate projections of future spending in 1946, it would have looked far more scary than the Social Security projections do now. In the same vein, many people want the U.S. to have a Cold War with China. China’s economy is already more than 20 percent larger than ours and is growing considerably more rapidly. (The Soviet economy peaked at around 60 percent of the size of the U.S. economy.)
We are currently spending a bit more than 3.0 percent of GDP on the military. We spent 6.0 percent of GDP during the Reagan military buildup in the 1980s. If we went to this level of spending, or higher, to match the spending of a larger enemy, the projections would look much worse than anything we see with Social Security.
We’ve Already Seen Most of the Cost Increase
The Social Security trust fund built up a large surplus in the years when most of the baby boomers were in the labor force. This trust fund is helping to cover the current costs of the program. However, the cost themselves have been rising for the last fifteen years.
We went from spending 4.19 percent of GDP on Social Security in 2000 to spending 5.22 percent of GDP this year, an increase of 1.03 percentage points. This cost is projected to increase further to 6.03 percentage points by 2040, a rise of 0.81 percentage points.
This increased cost will impose some burden on the economy, but less than the increased burden we have seen to date. So, the idea that we are looking at some horror story down the road doesn’t make any sense, unless we think we are already living a horror story.
It’s Not True that Our Only Choices are Raising Taxes or Cutting Benefits
Contrary to what NPR told us yesterday (“Patching the program will require higher taxes, lower benefits or some combination of the two”), there is an alternative. Historically, Social Security has been funded by its designated taxes, as noted earlier. But, if we are changing the law, we can also change this feature of Social Security.
We could have it funded in part from general revenue, like the military or almost every other program. There are reasons we may not want to make this switch, but it is wrong for NPR and others to tell us that it is not a possible option. It is.
Can we spend more from general revenue without raising some taxes? That is an open question. From an economic standpoint, it doesn’t matter whether spending comes from past surplus accumulated in the trust fund or whether it’s simply an appropriation from general revenue. As noted above, we have already seen most of the burden associated with the retirement of the baby boomers; perhaps we could see the additional burden without any additional taxes.
If the economy’s main problem is secular stagnation (a lack of demand) as economists like Larry Summers argued before the pandemic, there is little reason to believe that the additional deficits associated with higher Social Security spending will be a major problem. This would especially be the case if artificial intelligence leads to the huge productivity boom that many analysts are predicting.
The Untold Great Story on Medicare
The Trustees Report released yesterday showed a further improvement in Medicare’s finances. This is a huge deal that has gone largely unreported. In 2000, the Medicare Hospital Insurance Trust Fund was projected to face costs of 1.91 percent of GDP this year and 2.54 percent of GDP in 2040. In the most recent report, we are projected to spend 1.52 percent of GDP this year and 2.12 percent in 2040 — a savings of 0.39 percentage points of GDP this year and 0.42 percentage points for 2040.
These savings have hugely helped the program and meant that we have far more resources to spend elsewhere. People pushing scare stories probably don’t want to promote these facts, but that is the world.
Anyhow, there are clearly issues with how we will deal with the retirement of the baby boomers, but the situation is not nearly as dire as many would like us to believe.