Social Security and Medicare: What's The Real Cost?

What with the much benighted Washington debate, what can the states do to improve the economy – or more specifically, fight unemployment?

What’s wrong with the “unfunded liabilities” stories that conservatives tell about Social Security and Medicare? This is where they make the case that over some very long time horizon, these programs are supposed to pay out tens of trillions more than they’re scheduled to take in.

These are mostly scare tactics, designed to mislead. That said, there’s a useful point embedded in them: both programs need to undergo changes to meet their obligations. But at least some of the folks who make the “trillions in unfunded liabilities” argument do so to make it seem like we can’t afford social insurance, which is nonsense.

There are two misleading tactics the UL types make.
First, yelling “trillions” in a crowded theater. That is, failing to scale the liabilities by the size of the economy. The net present value of the Social Security and Medicare shortfalls over the 75-year horizon are in the trillions, but as the share of the economy, which also grows over all these years, they’re around one percent.

The other thing the UL’ers do is calculate the shortfall over an infinite time horizon. That’s just bad policy analysis. Again, if you do the math relative to GDP or payrolls as you should, the shortfall amount is fractional. But a moment’s reflection should lead you to wholly discount forecasts out to infinity. Who knows what growth, productivity, and population trends will be that far out in the future?
We know that if we want these programs to last, we need to raise revenues or reduce benefits. The fixes for Social Security are known and not deeply burdensome. Lowering the growth rate of health costs is harder because we’re not sure how to do it. But we know we must, both in the private and public sector, or else health spending will eat up far too much of our national income in the future (from about 17% of GDP today to twice that twenty years hence).

Most everything else is just noise.

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