The Baby Boomers are retiring and signing up for Social Security, Medicare, and Supplementary Medical Insurance (prescription drug coverage) benefits. I recently read that 10,000 people are retiring per day. That is over 3 million per year.
Our social insurance taxes stopped covering the costs of the benefits about five years ago. So now there is a deficit that will grow very large. There is a debate that seems concerned with how long the Trust Fund will last before it is depleted. However, I think that entire discussion misses the real issues. Unless new taxes are levied, that deficit will have to be funded with new issue of debt to the public.
Consider the Social Security Administration needing to cover a deficit to pay benefits. They hand over their special-issue treasury bonds to the U.S. Treasury for the cash. Of course, since the U.S. government runs a budget deficit, the Treasury doesn’t have the cash. So they issue new bonds to the public. So debt that is held within the government (called interagency debt) is converted to public debt and starts to impact the debt markets and interest rates.
What are the sizes of these new debt issues?
I began by obtaining the predicted general revenue shortfalls for Social Security, Medicare, and Supplementary Medical from the Social Security Administration. They come in percent of GDP. So, I take the 2013 GDP (about $16.7 trillion) and grow that into the future using a 2% real growth rate. Combining the shortfalls and the GDP estimates results in this graph.