Sluggish Economy Slams Social Security
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Sluggish Economy Slams Social Security

iStockphoto/The Fiscal Times

The sluggish economy is taking its toll on the financial outlook for Social Security and Medicare.

The latest trustees’ reports released Monday showed that Social Security will exhaust its trust fund by 2033, three years earlier than projected a year ago. That is when the $2.7 trillion surplus generated over the past three decades runs out and the nation’s retirement system can only pay about 75 percent of promised benefits.

Medicare’s trust fund exhaustion date, meanwhile, remains in 2024, the same as last year. It didn’t budge largely because of savings contained in the Affordable Care Act (better known as Obamacare), which could be ruled unconstitutional in June. Passage of the ACA in 2010 had extended Medicare’s trust fund exhaustion date by seven years to 2024.

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The slow-growing economy is creating problems for both programs. Because unemployment is high and income growth for those who are working has been low to nonexistent, the payroll taxes that support senior entitlement programs are not meeting expectations. Total earnings last year were 1.6 percent less than previously projected. Moreover, beneficiaries, after several years without a cost-of-living adjustment, saw their government pension checks increased by 3.6 percent last year to cope with higher food and fuel prices.

To make up Social Security’s larger shortfall, payroll taxes, currently 15.3 percent on the first $110,100 of taxable income split between employees and their employers, would have to be increased by 2.67 percentage points in 2033 in order to maintain full benefits. That is 0.44 percentage points more than what was projected a year ago.

The deteriorating outlook for Social Security heightens the stakes in this year’s election, where the long-term financing woes of Medicare had already become a major campaign issue. Republicans are increasingly rallying around a plan to turn Medicare into a voucher program, which has won support from a few centrist Democrats like Sen. Ron Wyden of Oregon.

It’s now possible that rival visions for the future of Social Security will also get raised on the campaign trail, even though it is usually considered the “third rail” of politics. Treasury Secretary Timothy Geithner, who sits as an ex-officio member of the Medicare and Social Security trustee boards, foreshadowed how President Obama plans to tackle both issues. “Adjustments to Social Security and Medicare must be balanced and evenhanded,” he said. “We will not support proposals that sow the seeds of their destruction in the name of reform, or that shift the cost of health care to seniors in order to sustain tax cuts for the most fortunate Americans.”

“Today's reports make it clearer than ever that doing nothing is not an option,” said House Ways and Means chairman Dave Camp (R-Mich.), health subcommittee chairman Wally Herger (R-Calif.), and Social Security subcommittee chairman Sam Johnson (R-Texas) in a prepared statement. “Republicans have been focused on finding solutions to the serious challenges facing our nation. However, the administration has failed to lead, and Congressional Democrats have resorted to demagoguery rather than finding long-term solutions to protect Medicare and Social Security for current and future beneficiaries.”

Unlike Social Security, whose finances are straightforward and more predictable because it is a pure income transfer program going to a population that is already alive with predictable mortality rates, the Medicare report is more speculative. It is based a numerous assumptions that rarely play out as planned.

Medicare’s 2024 exhaustion date depends, for instance, on physician pay being cut 30.9 percent next January, which has never been allowed by Congress. It also depends on the Affordable Care Act’s Independent Payment Advisory Board, which will recommend cost cuts for Medicare if it grows significantly faster than the rest of the economy, going into effect. Republicans have vowed to eliminate the IPAB, which they accuse of being a health-care rationing board.

The projection also depends on physicians and hospitals achieving significant productivity improvements based on delivery system changes contained in reform. Many experts and the Congressional Budget Office have taken a “wait and see” attitude toward those savings.

If the IPAB is repealed, the so-called “doc fix” on physician pay continues to get passed and the productivity improvements don’t come to pass, Medicare will grow from 3.7 percent of gross domestic product in 2011 to 10.4 percent of GDP in 2086, according to the report. Under current law, which assumes all those efficiencies are realized and is the basis for leaving the trust fund exhaustion date at 2024, Medicare’s costs still nearly double to 6.7 of GDP.

“Under current law, both of these vital programs are on unsustainable paths,” said Robert Reischauer, the outgoing president of the Urban Institute and a public trustee.