Thursday, December 18, 2008

Social Security/Medicare/Medicaid Trust Funds broke?

The media will run a story now and then on when SS/Medicare will go broke.Are they already?In a sense,yes,they are broke today.A little background on how it works.

The Treasury has 4 separate trust funds.2 for SS and 2 for Medicare/Medicaid.These funds totaled about 2.6 quadrillion dollars at the end of fiscal 2007.The problem is they don't have 1 cent of cash.It's all Treasury issued securities which are basically paper IOU's to be paid by taxpayers out of the general fund when the bonds come due.

Everyone's payroll deductions for SS/FICA flow into the Treasury general fund and the securities are deposited into the trust funds.So,benefits are paid out of the cash from the general fund by cashing in these securities.When they say SS or Medicare/Medicaid will go broke in a designated year,this simply means that benefits paid will exceed incoming payroll deductions and premiums paid by Americans.The negative balance will then have to be paid out of the general fund.

Benefits would continue to be paid as it would political suicide for Congress not to.This just means funds would be increasingly diverted from other budgeted expenditures in the general fund.The fear mongers will lead you to believe that the day they go broke,the benefits will stop.This is clearly not the case.

One solution would be stop issuing securities for the incoming payroll taxes the treasury receives,and instead force the Fed to deposit actual cash into the trust fund and thus not allow it to pooled into the general fund.This would guarantee the money is actually there and not allow it to be used for any other purpose.

You can then take up the question of whether to invest this money to grow it,or to increase payroll deductions to meet future projected needs.Investment has appeal.Rather than remove this cash from the money supply,investing would help to inject funds into the markets.However,you always have the potential risk with any investment.The taxpayer choice would be to take the risk in lieu of higher taxes.More to come...

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