Social Security and Medicare: Finances Worsening
Policy + Politics

Social Security and Medicare: Finances Worsening

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It is commonplace for politicians to suggest dramatic changes are needed in Social Security and Medicare or the programs won’t exist “for our children and grandchildren.” The annual trustees report for those two programs released on Friday reveals a future in which benefits are reduced, not eliminated.

If nothing at all is done to Social Security, the government will have to cut montly benefits for retirees by about 25 percent by 2036 – or one year earlier than last year’s report projected.

For Medicare, the hospital trust fund  will exhaust its surpluses by 2024, fully five years earlier than projected a year ago. At that point, the health care program for seniors  would have to cut reimbursements to hospitals, home health aides and other providers by 10 percent.

Would that prompt a health care crisis in the country? That would depend on one’s perspective. Some proposals by lawmakers and policy groups for solving these entitlement  “crises” would institute even larger cuts for future retirees. For instance, the House-passed  Republican “Path to Prosperity” would require future seniors who are 55 or younger (those 40 to 55 now would be 65 to 80 in 2036) to pay an estimated 68 percent of their Medicare costs, up from the current 20 percent, according to a Congressional Budget Office analysis.

Doing nothing eventually would lead to significant cutbacks for future beneficiaries of both programs. As the two newly appointed public trustees – Robert Reischauer of the liberal-leaning Urban Institute and Charles Blahous of the conservative-leaning Hoover Institution – pointed out in their joint comment at the end of the new report, the longer Congress and the president wait to enact the changes, “the more adverse the consequences will be for those who will bear the costs of closing these imbalances.”

The past year’s deterioration in the financial position of both programs is almost wholly tied to the weak economy. When people aren’t employed, they don’t contribute payroll taxes to either fund. Last year, for the first time since 1983, Social Security payouts exceeded the program’s non-interest revenue. That projected deficit is $46 billion for 2011.

But despite the cash flow deficit, the trust fund surplus is still mounting and will continue to through 2023. The federal government’s general fund last year credited the Social Security trust fund with $108 billion in interest based on the $2.4 trillion in assets (government bonds) it holds in its account.

The Debate:  Truth vs. Fiction
One of the big debates in political circles is whether those assets are real, the position of most Democrats, or a fictitious accounting entry, which is the position of most Republicans and conservative policy experts. One needn’t take sides on that question to note that the $2.4 trillion in surpluses generated from Social Security taxes since 1984 were spent on other government programs while giving tax breaks to nearly every person and interest group in society, with some, of course, receiving more than others.

Anyone looking for someone to blame for the future shortfalls in Social Security might want to start there.
Medicare is a bit more complex, since its nearer term financing crisis is driven by sharply rising costs as well as a graying society. Yet it is better off than it was before passage of the Affordable Care Act, which extended the life of the trust fund by eight years. “Medicare costs will be on average 23 percent lower due to the new law,” Health and Human Services Secretary Kathleen Sebelius said.

However, the trustees report is based on current law, which in addition to factoring in projected savings from health care reform, assumes that doctors who serve Medicare patients starting in 2012 will be paid 29 percent less than they are paid now. Congress has never let that happen since 2003, the first year those cuts were supposed to go into effect. “It’s built in” to the report, admitted a senior administration official. “It’s not very realistic.”

Those looking for the most immediate crisis foreshadowed by the trustees report might want to sift through the projections for the Social Security disability trust fund, which began paying out more than it took in (including interest on its trust fund assets) in 2009 and will exhaust its assets in 2018. The number of people collecting disability benefits increased by 50 percent to 9.9 million over the past decade, and is projected to increase another 15 percent or so in the next decade. The slowdown in its growth is due to the fact that the bulk of the Baby Boomers by 2020 will have entered or be near retirement.

During economic downturns or during times when economic growth is sluggish, as has been the case for most of the past decade, many older workers who lose their jobs and can’t find work in their former professions find ways to begin collecting Social Security disability, often after their unemployment insurance expires. A senior administration official estimated only half of people on disability are incapable of any type of work.

To deal with that issue, Labor Secretary Hilda Solis stressed the importance of creating systems for disabled workers to reenter the workforce and find suitable employment. “People with disabilities can and want to work,” she said. “Yet their unemployment rate remains high.”

Trustee Michael Astrue called for creating incentives for employing the disabled, such as informing them that they won’t lose their health benefits if they go back to work. “Disability legislation based on anecdotes and sound bites would not be conducive to real reform,” he said. “We need clear incentives so that people who want to return to work can do so.”

Related Links:
Democrats, GOP at Odds Over New Medicare, Social Security Warning (CNN)
Medicare, Social Security Finance Outlook Worsens (WSJ) 
Medicare and Social Security Trustees Report: Capitol Hill Reaction (Washington Post)