The trustees of the federal government’s two largest entitlement programs – Social Security and Medicare – reported Friday that the Medicare hospital insurance fund is a bit further away than projected last year from exhausting its assets and being unable to pay the full benefits promised to retirees and the disabled in the decades ahead.
The Medicare Hospital Insurance fund will exhaust its assets in 2026, two years later than projected last year and the assets in the Social Security funds will be depleted in 2033, the same date the trustees predicted in last year's report.
The trustees explained that the pushing back of the trust funds exhaustion date for Medicare's hospital insurance program is due partly to lower projected spending in the future for skilled nursing facilities and other services.
In an encouraging note for President Obama, the trustees said recent data suggest that certain parts of the Affordable Care Act will reduce growth in medical care costs "by more than was previously projected."
Every year the trustees report to Congress on the financial condition of Medicare and Social Security and their ability to pay future benefits.
The trustees are Treasury Secretary Jack Lew, Health and Human Services Secretary Kathleen Sebelius, Acting Secretary of Labor Seth Harris, Acting Commissioner of Social Security Carolyn Colvin and two citizen trustees appointed by the president, Charles Blahous, a former economic advisor to President George W. Bush and economist Robert Reischauer, former head of the Congressional Budget Office.
At a briefing for reporters Friday, Sebelius cheered the good news about restrained growth in the cost of medical care. Medicare spending per beneficiary grew by only 1.7 percent last year, below the growth rate in the gross domestic product.
But on Social Security, trustee Blahous warned “it’s getting very late in the game to deal with Social Security’s finances in a realistic way.” He said the fact that the combined Social Security trust funds aren’t depleted until 2033 “shouldn’t mislead us into thinking we have until 2033” to deal with the shortfalls in Social Security.
If Congress wanted to solve the Social Security shortfall entirely by using a tax increase, it would need to immediately raise the payroll tax rate from 12.4 percent to 15 percent. If Congress delayed the action until 2033, the tax would need to be raised to 16.5 percent, Blahous said.
More than 50 million Americans collect Medicare benefits and nearly 57 million retired, disabled, and other Americans receive Social Security benefits. Together the two entitlement programs account for 38 percent of all federal outlays – a percentage that is growing as members of the Baby Boom generations retire and start collecting benefits.
Inexorable demographic pressures, reflecting the fertility patterns and lengthening life spans of the past several decades, is slowly pushing both programs toward insolvency, with too few younger workers and too many older people reaching eligibility age to collect benefits.
In 1960 there were five workers paying into Social Security for every person who was receiving benefits; by 2025, there will be 2.3 workers for every beneficiary, and by 2035 only 2.1 workers for every beneficiary – which means either workers in the future will need to bear a heavier tax burden, or benefits will need to cut, or both.
The same pressures apply to the Medicare hospital insurance program, also called Medicare Part A.
For most of the past 30 years, since the 1982 reforms to extend Social Security’s solvency, that system has collected more in revenue from Social Security taxes on workers than it has paid out in benefits to retirees, widows, orphans, and the disabled.
The excess money has gone into the trust funds in the form of Treasury bonds which earn interest which helps pay for Social Security and Medicare benefits. The bonds in the trust funds are cashed in to pay the benefits promised to future retirees.
“The redemption of those bonds can only occur out of current income,” explained the former Senate Budget Committee chairman Kent Conrad in 2010.
The date of “trust fund exhaustion” means the date when there are no more bonds in the funds that can be cashed to pay benefits. Exhaustion of the funds does not mean that all benefit payments would cease at that point.
The trustees explained that after the Social Security trust fund exhaustion date in 2033, the continuing income from payroll taxes will be sufficient to pay 77 percent of promised benefits.
The Social Security disability program is a more immediate problem. The trustees' report said the need to fix its shortfall is "most urgent" as its fund will run dry only three years form now, in 2016.
From 2006 to 2011 the number of people collecting Social Security disability benefit increased by more than 25 percent.
There are two Social Security funds: the Disability Insurance fund and the Old-Age and Survivors Insurance fund. Most analysts look at the system’s finances as a whole and aggregate the two funds.
Obama has proposed reducing future Social Security benefits by switching to an inflation measure called “chained CPI” which his fiscal year 2014 budget proposal says “will reduce deficits and improve Social Security solvency.”
This story was originally published on Fri May 31, 2013 11:09 AM EDT