Shrinking of US deficit could also help Social Security outlook, but probably not by much

WASHINGTON – As the U.S. recovery slowly gathers steam, federal deficits are finally coming down from their nosebleed $1-trillion-plus heights. That will postpone until fall a new budget showdown between Congress and the White House — and also will probably delay the days of reckoning, feared by millions of aging Americans, when Social Security and Medicare could become insolvent.

Why does it matter? If those programs’ money dries up, benefits must be reduced.

Some answers on future financial prospects should come Friday when trustees overseeing the two popular programs issue their annual report. Last year they projected that Medicare funds would run dry in 2024 and Social Security’s trust funds would follow in 2033.

The trustees have steadily been moving those dates closer, even as almost 10,000 baby boomers a day have been reaching retirement age and qualifying for benefits.

What next? Ahead of the new report, here are some central questions and answers about deficits, the national debt and the outlook for the government’s two biggest “entitlement” programs.


Q: What if no agreement is reached between the White House and Congress to guarantee the future solvency of Social Security and Medicare?

A: If funds become exhausted, the two programs will find themselves collecting only enough money in payroll taxes to pay partial benefits to the millions of American recipients. Payroll taxes are in addition to — and collected along with — your federal income taxes.


Q: What will forced reductions mean in dollar terms for those receiving benefits?

A: The Social Security trustees have suggested that once the reserves are gone, incoming payroll taxes will cover roughly 75 per cent of the program’s promised benefits. So that could mean an immediate 25 per cent cut in benefits. That would reduce the average monthly Social Security check — now $1,266 — to roughly $950 a month. Medicare’s giant hospital fund could pay only 87 per cent of costs.


Q: How likely is this to happen?

A: Such deep mandatory cuts seem highly unlikely, given the political heat that would be sure to rise to unbearable levels as the deadline neared and if the White House and Congress still failed to act. A compromise of some sorts to avoid a cut in benefits seems inevitable But as recent events have shown, finding common ground is becoming increasingly difficult in partisan and polarized Washington.


Q: Will Friday’s report show an improvement in light of the government’s budget advances?

A: It may but perhaps only a small one, given continued general weakness in the economy. “I think the relatively good news on the budget front could well translate into at least slightly better projections,” says Paul Van de Water, an analyst with the Center on Budget and Policy Priorities, a liberal-leaning think-tank . “There’re so many moving parts to these projections that I never want to go out on a limb. But there is certainly some reason to be slightly optimistic.” In the meantime, the economy is far from healed, with still-sluggish growth and a 7.5 per cent unemployment rate that is still way above pre-recession levels of around 5 per cent.


Q: Won’t any improvement in Social Security and Medicare finances just let Congress “kick the can down the road” again?

A: Today’s sharply divided Congress does have a history of procrastinating. It’s inability to find common ground on spending cuts by a deadline last March 1 resulted in the “sequester” of automatic spending cuts that are trimming $42 billion from government programs through Oct. 1. Social Security and Medicare were exempted. But long delays and squabbles over Obama’s 2011 request to raise the national debt ceiling resulted in a first-time-ever credit downgrade on U.S. bonds.


Q: With the army of retiring baby boomers, what are the future prospects for Social Security and Medicare?

A: “The real problem starts about 2017 or 2018, when the deficits start going up again,” says veteran budget analyst Stanley Collender. And there’s little in the way of congressional fixes that are under serious consideration.

House Budget Committee Chairman Paul Ryan, R-Wis., has proposed some major revisions in the structure of Medicare. And President Barack Obama has proposed altering the formula for automatic cost-of-living Social Security increases that would result in lower future benefit increases. But neither proposal has gained much traction on Capitol Hill.


Q: “Deficit” and “debt.” Where do budget deficits come from, anyway, and how do they relate to the national debt?

A: The deficit, the amount the government must borrow when its annual spending exceeds its receipts, is just a one year-slice — as if someone only looked at how much his credit-card and other household debt increased or decreased in a single year without regard to total debt owed. The budget deficit for 2013 is now projected by the Congressional Budget Office to fall to $642 billion from $1.1 trillion last year and a record $1.4 trillion in 2009. The national debt, meanwhile, is the nation’s total indebtedness, the still-outstanding amount owed from the accumulation of many annual deficits going back to the Revolutionary War, offset only slightly by rare years of surplus, most recently 1998-2001. The Treasury’s Office of the Public Debt, which keeps track to the penny, said that as of two days ago, the national debt stood at $16,737,219,726,401.22 — or, rounding off, $16.74 trillion.


Q: How much of this debt has happened on Obama’s watch compared to other recent presidents?

A: The national debt first passed the $1 trillion mark in Ronald Reagan’s first year and stood at just over $3 trillion when he left office. George H.W. Bush, took it to over $4 trillion after serving a single term. Under Bill Clinton, it grew to nearly $6 trillion, despite those back-to-back budget surpluses at the end of his second term. By January 2005, as George W. Bush began his second term, the debt was $7.6 trillion. When Obama was sworn in in January 2009, it stood at $10.6 trillion. So it has grown by just over $6 trillion so far in his presidency, which has included two major wars and the deepest economic downturn since the 1930s.


Q: Finally, what is the debt ceiling that Washington keeps arguing about?

A: It’s the legal limit Congress sets on the allowable size of the national debt. Routinely raising it — frequently — was seldom controversial until recently. Reagan raised the debt limit 18 times, and Congress generally went along obligingly. As a senator, Obama voted against George W. Bush’s request to raise the ceiling in 2006, calling the increase “a sign of leadership failure.” He later called his no vote a political gesture and a mistake.


Associated Press writers Ricardo Alonso-Zaldivar and Martin Crutsinger contributed to this report.


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