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Video transcript
Voiceover: When we learned about Social Security, we saw that the people who are currently working are paying their FICA taxes. Essentially those revenues are being used directly to provide the Social Security benefits for existing retirees and other beneficiaries. Any surplus goes to the Social Security Trust. When you had this baby boomer generation, on the left hand side of this system right here. The baby boomer generation is this huge population boom that happened after World War II after the country was happy and all the soldiers had come back. They produced a lot of babies. You get this population boom. 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. That did help build the surplus. The problem is is that they didn't produce; the population did not grow as much in the next generation. You could view that as a problem or a good thing. It's a problem in the context of Social Security because starting recently, and over the next few decades, this baby boom generation is going to move onto the right hand side of this equation. We saw that they will start to draw down even this surplus fairly soon. Because of this demographic change, the Social Security surplus will be completey depleted between 2030 and 2040. Medicare is very similar. You have some portion of the FICA tax is for Medicare. That revenue is used to pay for the health benefits of the retirees. Any surplus goes into a Medicare trust. That Medicare trust, the formal name is the Hospital Insurance Trust Fund. The problem with Medicare is that the situation is even worse. The Medicare trust, or we could say the Medicare system is already running at a deficit meaning that they're spending more money on the right than they're getting in on the left. They're already starting to draw down, already starting to draw down their trust. Social Security, at least the trust is continuing to grow until 2023. That's our best estimate right now; then it'll start drawing down. It'll get depleted between 2030 and 2040. In Medicare, the situation's a lot worse. In Medicare, we are already starting to draw down the trust. We are already spending more on beneficiaries than we are taking down; than we were taking in FICA revenues. The entire trust, based on our current assumptions, will probably be depleted in the next ten years; depleted in next ten years. What makes Medicare especially troubling, despite the fact that it's in a worse financial position, is that these costs are growing even faster. I want to be clear. A lot of people think that the .... 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. With Medicare, that's also going on. 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 health care costs For Social Security, these people's benefits could just go up with inflation. For Social Security, these people's benefits could just go up with 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. That's going well above the cost of inflation. You have the situation where, based on current benefits, and our best assumptions about the economy and the FICA taxes coming in, you have a reality where if you had to give the current benefits, and if you expect medical costs, health care 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; right now it's roughly about 23 percent of our budget, 23-24 percent of our budget, or about four percent of our GDP. Here we are in 2011. It's about four percent of our GDP we're spending on Medicare and Medicaid. Medicaid is essentially health benefits for mainly the poor. It's run by the states, but it gets federal funding. Right now, that's four percent of GDP. Because of the cost growth in health care costs, if we leave it completely unchecked over the next 50-60 years, it could grow to 15-16-17 percent of GDP. Just to be clear, that's the percentage of GDP that's roughly our entire federal budget. This has a potential, if we don't grow our budget any, to acutally crowd out a lot of other things. Just to understand this graph a little bit, they show the part and the cost of Medicare, the part of the growth due to different things. This is the effect of aging population. This is the effect of excess cost growth. This is the interaction of the two. To understand why that makes sense, you just have to think about the total cost being the product of the number. Maybe you could say the net number of recipients. Some people are paying in as well. This will hopefully help you understand what I'm talking about. Number of recipients, times the cost per recipient. Let's say that this is the cost per recipient. Cost per recipient, cost per recipient. If you take the number of recipients times the cost per recipient, you're going to get the total cost. Let's say that's the total cost today. That would be the area of that square. We're just multiplying the base times the height, current costs. Current annual cost, current cost. Because of demographic changes, you're going to have some increase in the net number of recipients. You're going to have some increase there. Because of medical cost growth, you're going to have a big increase in the cost per recipient. This thing is going to increase much more. If you go to some future point, and you can pick your future point. I'm really just trying to make you understand why we have these three categories. The total cost is going to be the total cost per recipient , that has grown dramatically, times the total number of recipients. Now you're talking about this area. This area is going to be the total cost. If you think about how much of this total cost is due purely to the increased cost growth, it would be this part right over here. This part would be the amount, the cost, the increase in the area purely due to the increased cost growth. That would be this part of the graph right over here. What part of this increased area is due purely to the increased number of recipients? That would be this part of the graph right over here purely due to the increased number of recipients. That is right over here, effect of aging population. You have some part of this area that's created by both the increase in the number of recipients and the increase in cost. That's going to be this area right over here, which is this part of the graph. When people talk about the unsustainable ... 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 counted in the government deficit. These are the things that are really, really scary. Something has to give. In all of this, the single factor that's driving most of the scariness is Medicare in particular. Not just Medicare, but it's not just the demographic changes, but specific to Medicare it's the increased cost of healthcare. If somehow that nut can be cracked, if healthcare 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 the scariness of what's going on with our obligations.