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Is the federal government going broke?

Posted
5/13/2011 11:24:00 AM
By: Daniel Pereira
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No.

But it's the kind of story that the government is only too happy to drop into the Friday afternoon news-hole. A report from the Boards of Trustees for Social Security and Medicare lays out the financial situations of two of the government's biggest programs.

Trustees Charles P. Blahous III and Robert D. Reischauer write that "long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided."

Specifically, the report shows that Medicare will be unable to pay out full benefits (of course, there will still be funds for a reduced level) by 2024, while Social Security will hit this deadline in 2036. In addition, Social Security ran its first deficit since 1983 in 2010, as the fund's supply of payroll taxes was battered by a vicious recession.

So, does that mean the government is bust? Is it time to pack up and go home - or to hand over the reins of power to the hardcore budget-cutters and privateers? 

Hardly. 

"The vital Social Security and Medicare programs face real and substantial challenges, and that elected officials will best serve the interests of the public if financial corrections are enacted at the earliest practicable time," write Blahous and Reischauer.

Social Security will probably be subject to more means-testing. Meanwhile, as the U.S. population ages and puts pressure on retirement funds, the government may be forced to raise the cap on payroll taxes. There will undoubtedly be wailing and gnashing of teeth over this - it makes the programs more overtly redistributive - but if the alternative is cutting benefits to politically-active seniors, Congress will likely see where its bread is buttered.

The real concern is Medicare, where a long-term failure to rein in the surging cost of healthcare could very well trigger a devastating scenario for U.S. finances.

Over the next week, though, look for a lot more apocalyptic rhetoric and a lot less clear thinking.