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The New Financial Outlook for Social Security and Medicare

Here's how to make sense of the latest solvency projections for these federal programs

By Bob Rosenblatt | June 26, 2012
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Bob Rosenblatt is a writer and editor specializing in aging issues. His blog, Helpwithaging.com, focuses on the finances of aging.

As you’ve undoubtedly heard, the 2012 Trustees Reports for Social Security and Medicare recently came out, with gloomy forecasts about the solvency of those federal programs. “Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers,” the report says.
 
But what do the projections really mean for you and for the future of Social Security's retirement program and Medicare's health benefits for Americans 65 and older? I’ve pored through the reports and talked with some experts to determine the bottom line.
 
Solvency of Social Security
 
The 2012 Trustees Report says that Social Security is now three years closer to a fiscal squeeze than it was last year. But there’s still plenty of time for Congress to figure out how to keep benefits flowing for boomers as well as future generations, according to the report. Some news stories saying that Social Security will be “exhausted” by the year 2033 may have misled you.
 
Here’s the truth: Social Security’s stockpile of Treasury securities will run out by 2033, and in that year payroll tax revenues will be sufficient to pay only 75 percent of the retirement benefits promised under current law. The crisis date was moved forward from 2036 in last year’s report because rising energy prices and the recession slowed the economy, reducing the amount of tax revenues flowing into Social Security.
 
For the second year in a row, tax revenues from Social Security fell below the benefits the program paid out. The difference was made up by interest earned on Social Security’s $2.7 trillion stockpile of U.S. Treasury securities.
 
No doubt about it, Social Security faces serious demographic pressures. There were about three workers paying taxes to support each beneficiary between 1974 and 2008, but that ratio will drop to 2 workers per beneficiary by 2035 because of the growing numbers of boomers who will retire and collect benefits.
 
The three-year advance in the year Social Security’s trust fund will be “exhausted” is a subject for concern, but not alarm. That date regularly bounces around in response to economic ups and downs. It has ranged from 2029 to 2042 in Trustees reports issued in over the past two decades.
 
The most likely formula for extending Social Security’s solvency will be a combination of payroll tax increases and benefits reductions, which is exactly what Congress did during Social Security’s last crisis, in 1983, when the program was in desperate need of shoring up.
 
The Trustees Report explains that Social Security could actually be made solvent for the next 75 years in one of two ways.
 
One would be immmediately raising the payroll tax rate from its current 12.4 percent (split equally between workers and employers) to 15.01 percent. But that would mean a worker earning $50,000 who now pays $3,100 in annual payroll taxes would pay an additional $752.50 a year; the same would be true for his employer. Republicans in Congress would never vote for this.
 
The other quick way to make Social Security solvent for 75 years, the Trustees Report says, would be to immediately cut benefits by 16.2 percent. That would mean the average monthly Social Security benefit of $1,229 would be sliced by $199.10. Democrats in Congress would never vote for this.
 
The lawmakers have until 2033 to come up with a Social Security reform package that will spread the pain in a politically acceptable way, and they’ll no doubt find one closer to 2033 than to 2012.
 
Solvency of Medicare
 
Medicare costs are rapidly rising and will consume an ever-growing share of the nation’s economy unless Congress can figure out a way to slow heath care spending, the Trustees warned in their report. Under current projections, spending for Medicare will climb from 3.7 percent of the nation’s Gross Domestic Product to 6 percent in 2040.
 
The budgetary threat from Medicare is much more menacing than the one from Social Security, for which future costs are more easily predicted, since we know the number of American workers and how long they’re likely to be on the job. By contrast, “projections of Medicare costs are highly uncertain, especially when looking out more than several decades,” the report says. “One reason for uncertainty is that scientific advances will make possible new interventions, procedures, and therapies. Some conditions that are untreatable today will be handled routinely in the future.” They could also make many Americans live longer than they do today, which could affect the number of people who'll receive Medicare benefits.
 
Medicare’s hospital trust fund, which is supported by payroll taxes, will run out of surplus funds in 2024 (the same date forecasted last year), the Trustees said. At that point, there will only be enough payroll taxes to pay 87 percent of Medicare’s projected costs. 
 
But Medicare’s financial situation could be much more ominous than forecasted, because the projections in the Trustees Report might be understating the magnitude of the problem.
 
For example, to come up with these figures, the actuaries had to follow current law, which projects a 30 percent cut in physician fees next year. In reality, Congress won’t allow that to happen.
 
The Medicare solvency forecast also assumes significant savings from the Affordable Care Act (aka Obama’s health reform law), which is being debated in the Supreme Court. Even if this law stands, its underlying intention to reduce the growth of U.S. health care spending will be difficult if not impossible to achieve, the Trustees note.
 
So without the cut in doctors’ fees and health reform’s savings, Medicare spending could accelerate by $153 billion in coming years.
 
Translation of the Medicare Trustees Report: Medicare is going to cost a lot more, and we have no idea how much.

And, as the report puts it: “While most technological advances to date have tended to increase costs, the health care landscape is shifting. No one knows whether these future developments will, on balance, increase or decrease costs.”
 
Given all the uncertainties about Medicare, not to mention the political landmines that come with tweaking the program, don’t expect Congress to deal with Medicare’s solvency issues in a major way until we’re much closer to 2024, when the hospital trust fund is projected to run out.