Disinherited. Diana Furchtgott-Roth

is scheduled to exhaust its trust funds by 2030.¹² Recall the octogenarian August Meyer, who spent a large part of his career paying into Medicare and was confident he had earned every penny of his Social Security checks—but his two knee replacements are not cheap. As the costs of end-of-life care continue to balloon, it is clear that those in his situation are getting the best end of the deal.

      When taken together, Social Security and Medicare account for almost 40 percent of the federal spending in 2014.¹³ Even though Social Security and Medicare are on an unsustainable path, young people and their employers continue to pay a combined 15.3 percent of their paychecks into the programs, funding current retirees with contributions the young will probably never see paid back.¹⁴

      The beginnings of Social Security go back to 1935, when the Social Security Act became law. While the Act was intended to provide for the needy and destitute, many prominent lawmakers raised substantive questions about its practicality, constitutionality, and potential for growth. Daniel Reed, then a New York Republican in the House, remarked that with the passage of the act, Americans would feel “the lash of the dictator.”¹⁵ Representative John Taber, another New York Republican, asserted, “Never in the history of the world has any measure been brought here so insidiously designed as to prevent business recovery, to enslave workers.”¹⁶ Senator Thomas Gore, an Oklahoma Democrat and the grandfather of author Gore Vidal, was quoted as saying, “Isn’t this socialism?”¹⁷

      Social Security had humble beginnings. In 1937, the program included a mere 53,236 beneficiaries who received a total of just $21 million in today’s dollars.¹⁸ Considering that the American government now spends $7 million a minute, this was not a substantial amount of money by today’s standards.¹⁹ By the end of 2013, total beneficiaries amounted to 58 million—over 1,000 times more beneficiaries than in 1937.²⁰ In fiscal year 2013, Social Security cost $808 billion—nearly 40,000 times what it cost in 1937, adjusted for inflation—amounting to almost 23 percent of federal spending.²¹ According to the 2014 Social Security Trustees’ Report, with an infinite horizon, the present value of unfunded liabilities in 2013 was $24.9 trillion.²²

      Social Security needs to move from a pay-as-you-go system, where what is paid in is quickly paid out, to a sustainable system that allows payments to grow as investments that can help pay for retirement. An adjustment in benefit calculations, sooner rather than later, will go a long way toward shoring up Social Security’s troubled finances. If the program is to be there for young people when they retire, something has to change—and fast.

      Geoffrey Levesque, a recent college graduate who is trying to build a career in television production, resembles many of his peers in that he does not expect to ever receive the money back that he is now paying in to Social Security. “Already I don’t know if the baby boomer generation will receive all of its Social Security,” he told us. “So I can’t even imagine what it will be for my generation. With how this government spends money, it will be unlikely. Whatever your political views are, there is a duty to help the elderly. They worked hard for their money. Still, I would be upset if I did not receive all of my Social Security, but, based on my experience so far, I am always prepared to be disappointed by the government.”

      Social Security is not the only major entitlement program that is facing serious actuarial problems. The projected aggregate cost of Medicare is staggering, and it is the main driver of our debt. The Congressional Budget Office has estimated that, under an extended baseline, Medicare expenditures as a percentage of GDP would grow from 3 percent today to 5.5 percent in 2050, and to 9.3 percent in 2089.²³

      Medicare’s modest origins can be traced to 1965, when President Lyndon Johnson signed it into law. The program was designed to provide medical care for those 65 and older, at a time when life expectancy was about 70 years.²⁴ In 1966, 19 million people signed up for the program, and it cost $30 billion in today’s dollars.²⁵ By 2013, 52 million people were enrolled—nearly a threefold increase. The program cost $583 billion in fiscal year 2013—20 times higher than costs in 1966—which represented 14 percent of total federal outlays that year.²⁶ To understand just how much the program has expanded in the last 30 years,²⁷ consider that as recently as 1980 Medicare spending amounted to a mere $101 billion, covering 28 million people.²⁸

      Medicare spending is projected to rise to 6.9 percent of GDP by 2088. Projected revenues—coming from payroll taxes and taxes on Old Age, Survivors, and Disability Insurance Program (OASDI) benefits that go into the Hospital Insurance (HI) trust fund—rise from 1.4 percent of GDP today to 1.8 percent of GDP by 2088, assuming current law. The portion of non-interest Medicare income that comes from taxes will drop from 41 percent to 28 percent at the same time that general revenue transfers will rise from 43 to 52 percent, and the share of premiums will rise from 14 to 18 percent.²⁹

      This change in the distribution of financing will happen because costs for Medicare Parts B and D (which are funded by general revenues) increase at a faster rate than do the Part A costs, according to Trustees’ projections. In 2088, the Supplementary Medical Insurance (SMI) program will need general revenue transfers of 3.3 percent of GDP, and the HI deficit will reach 0.5 percent of GDP in 2088. No provision exists to finance this deficit through general revenue transfers or any other revenue source.³⁰

      The Medicare Modernization Act of 2003 requires that the Boards of Trustees determine each year whether the annual deficit exceeds 45 percent of total Medicare costs in any of the first seven fiscal years of the 75-year projection period. If it does exceed 45 percent, then they must include a report on “excess general-revenue Medicare funding.” If two of these reports are required consecutively, then there is a “Medicare funding warning” that forces the president to respond to the overrun by proposing legislation within 15 days of the next budget submission. Congress is then required to consider the proposal with priority. So far, Washington has not responded to the funding warnings that have been a part of seven of the last eight reports. Politicians are breaking their own law. Again, Washington does nothing and then wonders why our fiscal position is deteriorating.

      Washington did pass a law constraining Medicare’s growth. Reimbursements to Medicare physicians are supposed to be trimmed whenever Medicare exceeds a pre-set growth rate. But Washington repeatedly repeals the proposed cuts to Medicare physicians. If it failed to do so, no doctor would participate in Medicare.

      In 2014, the HI deficit was $15 billion. Until 2030, interest earnings and asset redemptions will cover deficits of the HI trust fund. At that time, the trust fund will be bankrupt. After that, new revenue will be necessary. This will require some combination of increasing taxes, reducing benefits, cutting other government spending, and borrowing more from taxpayers. If nothing is done, then borrowing from taxpayers will need to reach 4.4 percent of GDP by 2040.³¹

      As these programs balloon, the old gain, and the young pay. Adjustments to Medicare’s growth rate, both in terms of coverage and cost, need to be seriously evaluated if the program is going to remain viable for those who are paying for it.

      The Social Security and Medicare Trustees’ report highlights the commonly known problems with Social Security. In 2013, Social Security benefits cost 14 percent of taxable payrolls. By 2035, they are projected to cost 17 percent; they will climb upward to 18 percent in 2088. For Medicare, costs were at 4 percent of taxable payrolls in 2013 and are projected to climb to 5 percent by 2050, then up to 6 percent in 2088.³²

      If trends continue, workers could be paying a combined employer-employee payroll tax rate of 32 percent in 2050 just to cover Medicare and Social Security payments.³³ The rate paid now is 15 percent.³⁴ That is a major cut to take-home pay that will severely affect consumer spending and investment. A 32 percent payroll tax rate seems unimaginable in 2014, but it is below rates paid by some other major industrialized countries. In France, the rate is 42 percent; in Germany, it is 39 percent; in Italy, 40 percent; and in Spain, 37 percent. The United Kingdom has one of the lower rates in Europe, at 24 percent.³⁵

      That does not even count the amount that taxpayers will have to pay from their paychecks for state deficits. States hold an additional $5 trillion in liability, of