04/05/2008 05:12 am ET | Updated May 25, 2011

Trust Not in Trust Funds

"Trust fund" is such a comforting term, especially if you're lucky enough to have one. It conjures up pictures of country clubs, prep schools, Paris and Nicky and other super-rich kids reeling out of clubs in the meatpacking district at three in the morning.

And on one level, we've all got a trust fund: the Social Security and Medicare trust funds, which are supposed to ensure a safe retirement for all Americans. You very likely missed it, but the trustees who oversee the two programs put out their annual report this week. In some ways, there's no real news. If you've been paying attention at all, you know that Social Security and Medicare are in long-term trouble. This year, the trustees estimate the Social Security trust fund will hold out until 2041. Medicare is in far worse financial shape because of skyrocketing health care costs, and its trust fund will only cling to life until 2019. On the face of it, this doesn't sound so bad. After all, 2019 is a decade away, and 2041 - that's almost Star Trek territory. Yet the trustees also spoke about the programs in apocalyptic terms, talking about "enormous challenges" and "funding warnings" and "detrimental economic impact."

So what gives? Well, the real problem is what's in the trust funds - or more accurately, what's not in there. The theory behind the funds was that the government would bank all the extra Medicare and Social Security tax revenue that's been coming in while the 78 million baby boomers are in the workforce. Then the government could draw down on the trust funds once the boomers start taking out of the system instead of paying in.

But that's not what happened. For many years now, the federal government has basically used all of its money to pay all of its expenses, and that includes Social Security and Medicare taxes. The government has long been using the "surplus" from these funds to pay its other costs, and giving the funds Treasury bonds in return (actually a special kind of "intergovernmental" bond used when the government owes money to itself). There's nothing secret or illegal about that, and there's nothing wrong with the bonds. Still, it is an accounting maneuver that allows government to shift money from one pocket (Social Security and Medicare) to pay bills in another pocket (the rest of the government). That's a boon for elected officials because then they can avoid pesky political problems like being forced to raise taxes or cut popular programs.

But now the party's almost over. The most frightening part of the trustees report is that Medicare needs to start drawing on its "trust fund" this year, probably to the tune of about $8 billion. Since the government has already borrowed the money for other things, it needs to start paying the Medicare trust fund back. Where will the money come from? From "general revenue" - essentially your tax dollars and mine. Eight billion dollars isn't huge in terms of this year's $3 trillion budget, but this is just the beginning of a much bigger trend. This problem hasn't even started rolling yet -- the first baby boomer won't even start drawing Medicare benefits for another three years.

People often talk about the trust funds as if the nation won't feel the pain until the funds actually run dry, but that's simply not the case. Since there's not that much there there, the government is going to give itself a financial hernia paying back the trust funds and keeping up with demand. The Government Accountability Office estimates we have $53 trillion in liabilities ahead of us over the next 75 years, mostly from Medicare and Social Security. The inevitable logic is that government will have to slash other programs to pay for these entitlements, or we'll have to raise taxes, or we'll have to cut people's benefits. And the longer we wait, the tougher the choices we'll face.

That's why we need to start talking about this now. We can fix these problems - although granted, some options are tougher than others. Some alternatives, like raising the cap on Social Security taxes or pushing back the retirement age, are pretty straightforward, and we can discuss the pros and cons pretty easily. Others, like the kind of major reform of the health care system that will probably be needed to fix Medicare, are going to be confusing, messy and difficult. But we need to start having a national conversation about this problem, and not be lulled into a false sense of security. Because it's absolutely certain that the American public will not allow the government to make major changes to their retirement benefits or their health insurance without their consent. So we'd better get the public in on this debate. Because we're running out of time.