Last month, with the quiet of a mouse, the Obama administration released a pair of reports on the financial health of Social Security and Medicare.[1] The programs' Obama-appointed trustees[2] (half of whom sit on his cabinet) oversaw the reports' preparation, which led some observers to believe they would give reassuring assessments. A few partisans may have even hoped the documents would discredit Bush administration claims that the programs face problems. If so, those folks were disappointed. The Obama reports show Social Security and Medicare are in worse shape than even the Bush administration had projected. No wonder Obama officials tried to keep things quiet.

The reports do implicitly discredit several popularly held beliefs about the programs. By wading through those myths, we can better understand the reports' findings.

One myth is that Social Security and Medicare operate as savings accounts. Supposedly, workers and their employers pay money into the programs and then, if a worker becomes disabled or reaches his mid-60s, he gets his Social Security money back in monthly payments while his Medicare money covers his medical expenses. In fact, Social Security is a simple tax-and-transfer program: money that workers and employers pay in today is immediately sent back out as Social Security checks to beneficiaries. Medicare's hospital benefits program (Part A) is likewise a tax-and-transfer program, while its Supplemental Medical Insurance (Parts B and D) is heavily financed with annual transfers from the federal government.[3]

Another myth is that Social Security and Medicare would be fine if Congress would stop "raiding" the programs' trust funds. The trust funds exist because, in some previous years, more money was paid into the programs than was paid out. The extra money was credited to the "trust funds" and then lent at interest to the federal government-not "raided." However, there has been no extra money coming into either program since 2009, and the Obama reports expect there won't be any in the future. Instead, Social Security and Medicare Part A pay out more in benefits than they receive in taxes.

Fortunately, the programs can cover those deficits, for the time being. Social Security currently earns enough in interest from its loans to the federal government that it can cover its deficit. Medicare Part A isn't in as good a shape, however: it has to call in some of its loans each year in order to cover its deficit. The Obama reports indicate that, sometime early next decade, Social Security will start calling in its loans as well.

A common myth is that the trust funds can cover the programs' deficits far into the future. But the Obama reports estimate that Medicare Part A will have called in all its loans by 2024, and Social Security will have done so by 2036. To put those numbers in perspective, a 62-year-old today will be 75 in 2024, and a 50-year-old today will be 75 in 2036. So plenty of today's workers will be dependent on the programs when they become insolvent.

A different myth is that, once the trust funds are empty, the programs will cease to operate. But even without the trust funds, tax money will continue to flow into Social Security and Medicare Part A, and the programs will continue to pay out benefits. The benefits won't be as large as currently promised, however. Social Security benefits will have to decrease by one-fourth in 2036 in order to match the program's revenue, while Medicare will have to find some way to cover a budget gap that will grow wider each year.

So what should be done? Social Security and Medicare keep many elderly out of poverty. At the same time, Social Security is a high-cost, low-benefit public pension program and Medicare is a costly health care program that provides increasingly meager services. Serious reform of the programs will not only restore their solvency, but also preserve their poverty-fighting while not reducing people's ability to prepare privately for their retirements. But as long as voters and political leaders continue to believe myths about the programs, serious reform will not happen.

 [1] Board of Trustees, "2011 Annual Report of the Boards of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds," May 13, 2011, available online at http://www.ssa.gov/OACT/TR/2011/tr2011.pdf. Boards of Trustees, "2011 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds," May 13, 2011, available online at https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf.

 [2] The six trustees are Treasury Secretary Timothy Geithner, Labor Secretary Hilda Solis, Health and Human Services Secretary Kathleen Sebelius, Social Security Commissioner Michael Astrue, Hoover Institute research fellow Charles Blahous III, and Urban Institute president Robert Reischauer.

 [3] For more, see Charles Blahous, "A Primer on the Social Security and Medicare Trustees' Reports, Parts I: Concepts," e21.com, May 23, 2011, online at http://www.economics21.org/commentary/primer-social-security-and-medicare-trustees-reports-part-i-concepts; and Blahous, "A Primer on the Social Security and Medicare Trustees Reports, Part II: Quantitative Findings," e21.com, June 3, 2011, online at http://www.economics21.org/commentary/primer-social-security-and-medicare-trustees-reports-part-ii-quantitative-findings.