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Online Extras: News to Note

August 30, 2012

Social security's woes are worse than you think

(Continued)

Right now, we spend more money on Social Security than on Medicare, and that will remain the case for a while. The programs' trustees project that by 2035 Social Security will consume 6.4 percent of the economy and Medicare 5.7 percent. The Medicare projection may be optimistic about recent attempts to impose cost controls, but we shouldn't expect Medicare to become vastly larger than Social Security in the next two decades. After that point, Social Security costs start going down as demographics play out while Medicare becomes a vastly larger problem.

But our finances will be in what's technically called a world of hurt before Social Security costs peak. Under current projections by the Congressional Budget Office, by 2025 public debt will have reached 106 percent of gross domestic product. By 2035, it will have reached 181 percent. What would happen after that point is an academic question: We can't allow ourselves to get there.

We need to fix both programs. If anything, it's Social Security that ought to be saved first because it's the more urgent near-term problem. Some of the steps we can take to make the program solvent, moreover, would improve Medicare's finances, too. Raising the retirement age, for example, would encourage people to work longer and thus pay more taxes into both programs.

Perhaps even more important, we have a better sense of how to restrain the growth of Social Security than of Medicare.

One promising option is to reduce the growth of Social Security benefit levels, especially for high earners. The program could be reformed so that high earners who retire in 2040 receive the same benefit level that high earners who retire in 2020 will — with an adjustment for inflation, but nothing more. Under the program as it stands now, those future retirees will get a bigger benefit.

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