On April 23, the Social Security and Medicare Board of Trustees released its annual reports on the two programs. These reports reveal there is not, in fact, an "entitlement" crisis, and that the alarmist language often placing blame on entitlements is generally a pernicious shorthand that glosses over the complicated fiscal challenges facing an aging society with rapidly rising health care costs. There are no significant changes since last year's reports from the Trustees, but the insolvency date of Social Security — the year in which benefits exceed the program's income — has been pushed back one year to 2041. A more serious concern, however, are Medicare costs, which are being driven almost entirely by faster-than-GDP growth of all health care costs. While these programs are often mistakenly grouped together in debate about long-term fiscal imbalances, there are different causes of these forecasted imbalances, requiring different solutions. At the recent annual conference of the Committee for a Responsible Federal Budget, current Congressional Budget Office Director Peter Orszag underscored this point by stating, "We do a disservice by uniting the health care issue with the aging issue," adding that neither aging nor "entitlements" in and of themselves are the problem. Instead, the real problem is health care costs that are spiraling out of control. Henry Aaron, Senior Fellow in the Economic Studies Program at the Brookings Institution, made a similar argument at a recent Economic Policy Institute forum entitled Beyond Balanced Budget Mania. In his PowerPoint presentation, Aaron showed how health care costs are the main factor in driving long-term fiscal imbalances in the federal government. The imbalance in Social Security is caused by demographic changes — the retirement of the Baby Boom generation — and can be fixed with minor adjustments to taxation and benefit levels or a combination of both. This year, Social Security benefit payments will equal 4.3 percent of GDP. In 75 years, benefit payments are projected to rise to 6.3 percent of GDP, according to the Trustees report. Despite this significant increase, the Social Security program has been bringing in more money from payroll taxes than it pays out in benefits, and will continue to do so until 2017. This is referred to as the Social Security trust fund and has been building a surplus in preparation for Baby Boomer retirements. From 2017 to 2041, projections show that Social Security benefits will be fully paid by a combination of revenue from payroll taxes each year and the Social Security trust fund. In 2041, the trust fund will be exhausted, but the Social Security program itself will continue to collect enough revenue from payroll taxes to pay three-quarters of promised benefits. The Trustees conclude that Social Security would be fully funded if small changes to the payroll tax rate and benefits paid to retirees over the next 75 years were enacted. In fact, a comparison from the Center on Budget and Policy Priorities helps to put the challenges facing the Social Security program in the proper perspective:

[t]he cost over the next 75 years of making the [Bush] tax cuts permanent will be about triple the size of the Social Security shortfall. Moreover, the cost over 75 years of the tax cuts just for the top 1 percent of Americans — people with annual incomes over $400,000 in today's dollars — is nearly equal to the cost of closing the Social Security shortfall.

This is hardly worthy of elevation to crisis status. Unlike Social Security, Medicare's rapidly rising expenditures are more complicated because they are not driven solely by demographic changes, but also rising health care costs. Because of this, the magnitude of the fiscal challenge is significantly greater. As the Trustees report demonstrates, the vast majority of the large increase in future entitlement obligations in these two programs is composed of costs within Medicare (the red and green bars combined): Projected Social Security and Medicare Shortfall (Percentage of GDP) While the demographic changes of the Baby Boomers generation will have an impact on the Medicare program as well, it will face more significant challenges from the steep increase in the cost of health care throughout the U.S. health care system. In both the public and the private sector, health care costs have been increasing significantly faster than economic growth and inflation and are expected to continue to do so. Over the next 75 years, Medicare expenditures are projected to increase from 3.1 percent of GDP to over 11 percent in 2081. One of Medicare's trust funds, The Hospital Insurance Trust Fund, is projected to be exhausted in 2019. The other, Supplementary Medical Insurance Trust Fund, will never be insolvent because the law ensures that a combination of fees and taxes will keep pace with expenditures. Because of these factors, controlling Medicare costs should have more to do with reforming and managing the skyrocketing costs in many different areas throughout the U.S. health care system, and less to do with a myopic focus on the structure of the Medicare entitlement program. None of this is to imply the fiscal challenges that will face the United States are not significant and even alarming. The trustees warn of the extent of the combined financial imbalances in both Social Security and Medicare, noting that "[i]n 2081, the combined cost of the programs will represent 17.6 percent of GDP. As a point of comparison, in 2006 all Federal receipts amounted to 18.5 percent of GDP." While this appears to be a big number, disaggregating it helps to understand the dynamics within the two programs, and yields two very different solutions — neither of which require drastically overhauling either program.