Long-run budget math - Paul Krugman: Start with the current position. Last year, federal spending on Social Security, Medicare, and Medicaid was 8.5 percent of GDP, equally divided between Social Security and the health care programs. Dismal long-run projections, like those of the GAO, have this total rising by 10 percentage points of GDP by mid-century.
So, how much of this is a Social Security problem? Pundits like Tim Russert love to point out that in its early days Social Security had 16 workers paying in for every retiree receiving benefits. But this is irrelevant; looking forward, we’ll see the worker-beneficiary ratio fall from about 3 to 2 as the baby boomers retire. This will raise the percentage of GDP spent on Social Security from about 4 to 6 — that is, a rise of about 2 percentage points of GDP, which is a small fraction of the entitlements problem.... What’s more, Social Security has already been strengthened to deal with this rise. In 1983 the payroll tax was increased and adjustments made to the retirement age, so as to build up a trust fund.... This brings us to the claim that the trust fund doesn’t exist, because it’s invested in government bonds. The full explanation of why this is sophistry is here.
The bottom line is that Social Security is just not the major problem. Now, part of the projected rise in Medicare and Medicaid costs represents the effects of an aging population. But as a new report from the CBO explains, demography is only a minor factor — mainly it’s rising health care costs. What’s more, the proposed “solutions” for the Social Security problem have no relevance to the issue of rising Medicare costs.... The Beltway obsession with Social Security is a classic case of a little knowledge being a dangerous thing. People have picked up a few facts about demography, and think they understand the long run budget problem. They don’t.
PS: OK, from some communications I see that 2017 — the projected date at which payroll taxes no longer cover benefit payments — has raised its ugly head. But there is no interpretation under which 2017 matters. Social Security legally has its own dedicated funding; if you believe the government will honor the law, the surpluses the system is now running are building up a trust fund, which will finance the system for decades after 2017, and maybe forever. If you think the law will be ignored, then Social Security doesn’t really have its own budget — the payroll tax is just one of many taxes, and SS benefits are just one of many government costs. In that case the relationship between payroll taxes and benefits is irrelevant.
The only way to make 2017 matter is to change the rules midway: when SS runs surpluses they don’t count, but when it runs deficits they do.