Federal Deficit and Entitlement Programs

¶ … Federal Deficit and Entitlement Programs

The current financial crisis and recession have highlighted a problem that has been becoming worse over the last several years, rising federal debt levels. This is problematic because the various entitlement programs of Social Security and Medicare are projected to increase the overall amount of debt levels in the coming years. An example of this can be seen with projections released by the Congressional Budget Office, which predicts that the national debt will increase to $20.3 trillion by the year 2020.

This highlights how the inability to address the problem, can no longer occur, as this is similar to a cancer that will eat away at the financial foundation of the country. Commenting about the seriousness of the issue Federal Reserve Chairman Ben Bernanke recently said the to National Commission on Fiscal Responsibility and Reform, "History makes clear that failure to achieve fiscal sustainability will, over time, sap the nation's economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability. Our nation's fiscal position has deteriorated appreciably since the onset of the recession and the financial crisis."

What this shows is that the twin forces of entitlement programs and the financial crisis have only increased the national debt. To fully understand the seriousness of the problem requires examining how the various entitlement programs can be reformed to lessen the severity of their impact and how the different entitlement programs along with the recession contributed to the problem. Together these different factors will provide the greatest insights; as to what actions can be taken to mitigate the problem and what will more than likely happen if the status quo remains in place.

How the Various Entitlement Programs can be reformed

To reform the various entitlement programs requires carefully examining how all of them have helped to contribute to the national debt. Currently both Social Security and Medicare account for nearly half of the total amount that is added to the national debt every year. However, these programs will continue to play a smaller role as far as the total contribution to the national debt is concerned, as interest will be the largest contributor by the year 2030.

This is significant because it underscores how a shift must occur in both fiscal and monetary policy. Where, Congress must be able to control spending and remain within the spending limits that are set. Rather, than continuing to raise the limit every time they come close to it. A good example of this can be seen recently when the federal debt ceiling was raised by $1.2 trillion.

At the same time, the government must engage in actions that will reduce the overall amounts of interest as much as possible. Since interest rates are sitting at multi-decade lows, the government could engage in strategy to refinance the national debt. This could help to mitigate some of the negative effects by ensuring that the total amount of interest on the debt always remains as close to zero as possible.

To reduce the overall effects of Social Security and Medicare on the national debt requires using a number of unorthodox methods that will help mitigate their total impact as much as possible. This would involve using a strategy that will be a combination of several different elements including: semi-privatization, reducing benefits and raising taxes. When most people hear the word privatization they will assume that everyone will be allowed to take their Social Security / Medicare contributions and manage them as they see fit. This is not entirely accurate; instead there should be limited privatization, where the individual can have a choice of annuities that they can invest in. This is a contract with an insurance company, where they will agree to pay an individual a certain amount of payments for a stated period of time or for life. In most cases, large pension plans will use annuities as a way to be able to fund their retirement benefits.

This kind of system can be adapted to Social Security, as way to reduce the overall expenditures, while providing the individual with greater choices. As far as Medicare is concerned, the annuity system could be augmented. In this situation, the annuity could be used to build up the funds necessary to cover medical expenses for someone when they become older. Once they become eligible for Medicare, then the contributions that they contributed to the annuity can be used to cover costs.

The reduction in benefits would not mean that people are cut off entirely from the two entitlement programs. Instead, the minimum ages for eligibility can be increased. This is important, because taking such actions would reflect the changes that are occurring. Where, life expectancy rates are increasing, yet the programs still reflect the life expectancy rates when they were enacted. A good example of this can be seen with a British study, which found that 50% of those people age 65 can expect to live to 81 years old if you are man and 84 years old if you are a woman.

This is significant because the increase in life expectancy rates means that the overall levels of health are improving. Therefore, it is logical to assume that by raising the minimum age, you are helping to reduce the overall drag that both entitlement programs can have on the national debt.

Another aspect of reforming both Social Security and Medicare would involve increasing taxes. This would mean, increasing the payroll tax that funds both programs and finding ways to account for any shortfalls. One way to this would be increase the marginal tax rates and have national sales tax on various products that could help cause health care cost to rise (such as a tax on soda / fatty foods). The reason why this is important; is because Medicare costs have been rising, due to increased health care costs that are being experienced. One could effectively argue that the lifestyle choices made by people are contributing to the problem, as various foods have been shown to help contribute to obesity. This kind of a tax would be fair because anyone who is using these products will indirectly contribute to both entitlement programs. This is helping to address the biggest issue that is facing both of them, increasing health care costs and the large numbers of retires. As a result, the effect of this kind of a tax would limit the increases that would be needed in the payroll tax and increases the total revenues to both programs With Federal Reserve Chairman Ben Bernanke saying, "Rapidly rising health-care costs and the aging of the U.S. population are among the primary forces putting upward pressure on the deficit and need to be brought under control. For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run at the same time, economic vitality is enhanced when taxes are not excessive and are collected through a system that is economically efficient, equitable, and transparent."

This is significant because it shows that if an effective system can be in place to fund both programs through several different taxes, you can help to reduce the overall amount of shortfalls that are being faced.

How Social Security and Medicare are Tied to the Current Recession / Financial Crisis

Social Security and Medicare are tied to the current recession / financial crisis in an indirect way. What happening is the recession has caused the total number of uninsured to rise dramatically, as there are currently 46 million Americans who have no health insurance. The reason why this is occurring is because most people have health insurance through their employers. As the unemployment rate rises, this means that their coverage could be in jeopardy once the employee is laid off.

This is troubling because the lack of insurance means that routine physicals and health screenings decline. Over the course of time, those who are suffering from various ailments / conditions will more than likely see their health become worse; because they do not have access to quality health care. Once this takes place, it means that many people will be able to receive some form of Social Security or Medicare benefits. Where, these people are forced to go to the hospital to seek treatment, because their conditions have become so severe. At which point, a combination of Medicare and their own personal funds will be used to pay for these health care services. The problem is that once someone's health deteriorates; it causes the overall costs to increase, as these people require the services of specialists. An example as to how extreme the problem has become can be seen with observations that were made by government actuaries who said, "Congressional action will be necessary to ensure uninterrupted provision of HI services to beneficiaries. Correcting the financial imbalance for the HI Trust Fund -- even in the short-range alone -- will require substantial changes to program income and/or expenditures."

What this shows is how the current financial crisis / recession have placed a drag on both programs that are facing severe challenges from the large numbers of uninsured. Where, the lack of health insurance is indirectly forcing people to turn to both programs, once their condition becomes so severe that it can no longer be ignored. At which point, the costs increase to treat these people which causes the overall levels of the national debt to increase.

However, the current recession is also having a direct impact on both entitlement programs. This is because a large number of Baby Boomers are approaching retirement age, which means that many will often look to both programs as way to supplement their income and health insurance. Then, when you combine this with the fact that the current recession is causing incomes to decline and health insurance premiums to increase, means that existing retirees are turning to both programs for assistance. As a result, the effect of these two different elements on Medicare and Social Security is a sharp rise in the number of benefits that are being paid out. An example of this can be seen with the 50% increase in benefit payouts in 2009. Commenting about what was taking place a spokesman for the Social Security Administration said, "We are seeing a significant increase in both retirement and disability applications as a result of the recession."