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Current time:0:00Total duration:7:52

Video transcript

when we learned about social security we saw that the people who are currently working are paying their FICA taxes those essentially those revenues are being used directly to provide the Social Security benefits for existing retirees and other beneficiaries and any surplus goes to the Social Security trust and when you had this baby boomer generation on the left-hand side of this of this system right here so the baby boomer generation is this huge population boom that happened after World War two after after you know the country was happy and all the soldiers had come back they produced a lot of babies and it was so you had this population boom and when this population boom was on the left-hand side of the system they were able to generate a lot of revenue to supply for the benefits for essentially their parents generation and so that did help build the surplus the problem is is that they didn't produce that the population did not grow as much in the next generation and you could do that as a problem or a good thing but it's a problem in the context of Social Security because starting recently and over the next few decades this baby baby boom generation is going to move on to the right-hand side of this equation and we saw that it will they will start they will start to drawdown even this surplus fairly soon and that because of this this demographic change the Social Security surplus will be completely depleted between 2030 and 2040 Medicare is very similar you have some portion of the FICA tax is for Medicare and that that revenue is used to paid for the health benefits of the retirees and the surplus goes into a Medicare trust and that Medicare trust of the formal name is the hospital insurance trust fund the problem with Medicare is that the situation is even worse the Medicare trust the Medicare or I guess we could say the Medicare system is already running at a deficit meaning that they're spending more money on the right they're spending more money on the right than they're getting in on the left so they're already starting to drawdown already starting to draw down their trust so Social Security at least the trust is continuing to grow until 2023 or that's our best estimate right now then it'll start drawing down and it'll get depleted in 20 between 2030 to 24 in Medicare situations a lot worse so in Medicare we are already starting to draw down the trust we are already spending more in beneficiaries than we're taking down it then we were taking in FICA revenues and the entire trust based on our current assumptions will probably be depleted in the next ten years depleted depleted in next ten years and what makes Medicare especially troubling despite the fact that it's in a kind of a worse financial position is that these costs are growing even faster and I want to be clear a lot of people think that though so for Social Security the main problem with this system over here is the demographic changes you have this huge population that's retiring the baby boomers which makes this not sustainable but with Medicare that's also going on but what makes Medicare even a bigger problem than Social Security is above and beyond those demographic changes above and beyond these this baby boomer generation retiring instead of paying into Medicare taking benefits from Medicare the big problem is that you actually have medical healthcare costs going up well above the cost of inflation for Social Security these people's benefits could just go up with inflation for Medicare the benefits go up with the cost of medical care and that's going well above the cost of inflation and so you have this situation where based on current benefits and our best assumptions about the economy and the FICA taxes coming in you kind of have a reality where if you had to give the current benefits and if you expect medical costs healthcare costs to continue to increase at the rate they're doing and there's no sign frankly that it is stopping then you have this reality that Medicare left unchecked could add right now it's roughly about 23 percent of our budget 23 24 percent of our budget or about 4 percent of our GDP so here we are in 2011 it's about 4% of our GDP we're spending on Medicare and Medicaid and Medicaid is essentially health benefits for mainly the poor it's run by the states but it gets federal funding so right now that's 4 percent of GDP but because of the cost growth in in health care costs and if we leave it completely unchecked over the next 50 60 years it could grow to 15 16 17 % of GDP and just to be clear that's the that's the percentage of GDP that aren't that's roughly our entire federal budget so this has the potential if we don't grow our budget any to actually crowd out a lot of other things and just to understand this graph a little bit they show they [ __ ] they show the part of the part in the cost of Medicare the part of the growth do two different things this is the effect of aging population this is the effect of excess cost growth and then this is the interaction of the two and to understand why that makes sense you just have to think about the total costs being the product of the number maybe you could say the net number of recipients because some people are paying in as well but this will hopefully help you understand what I'm talking about number of recipients number of recipients times times the cost per recipient so let's say that this is the cost per recipient cost per recipient cost per recipient so if you take the number of recipients times the cost per recipient you're gonna get the total costs let's say that's the total cost today so that's that would be the area of that square we're just multiplying the base times the height so current costs current annual cost current costs now because of demographic changes you're going to have some increase in the net number of recipients so you're going to have some increase there but because of medical cost growth you're going to have a big increase in the cost per recipient so this thing is going to increase much more and so if you go to some future point and you can pick your future point but I'm really just trying to make you understand why we have these three categories the total cost is going to be that total cost per recipient that has grown dramatically times the total number of recipients and so now you're talking about this area this area is going to be the total cost and if you think about how much of this total cost is due purely to the increased cost growth well it would be this part right over here this part would be the amount the cost the increase in the area true purely due to the increased cost growth so that would be this part of the graph right over here what part of this increased area is due purely to the ink number of recipients well that would be this part of the graph right over here purely due to the increased number recipients and that is right over here effect of aging population and then you have some part of this area that's created by both the increase in the number recipients and the increase in cost and that's going to be that's going to be this area right over here which is this part of the graph so when people talk about the unsustainable well one we have an unsustainable debt to begin with the second thing is is that the liabilities the obligations that we have aren't even on these aren't even counted in the government deficit and these are the things that are really really scary because something has to give so in all of this the the single factor that's this kind of driving most of the scariness is Medicare in particular and not just Medicare but it's it's not just the demographic changes but specific to Medicare is to increase costs of health care so if somehow that nut can be cracked if health care can all of a sudden grow maybe just with inflation or maybe even slightly faster than inflation but not at the rate it's growing right now then you could to a large degree mitigate kind of the scariness of what's going on with our with our obligations