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Social Security, Medicare Trustees Call for Legislative Action Now to Save Programs

‘Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible’

July 28, 2014 – The annual report on Medicare and Social Security by the trustees is no small matter – these two programs accounted for 41 percent of U.S. government spending in 2013. The trustees also issued a summary on the reports that – as they say – told it like it is! Things may look okay for now but neither program can be sustained without legislative changes. They emphasize sooner than later for these action.

Following is the summary statement from the trustees.

Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare.

Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

Social Security and Medicare together accounted for 41 percent of Federal expenditures in fiscal year 2013. The general revenue transfers into SMI and interest payments made to the trust funds are resulting in mounting pressure on the unified budget, as will the eventual decline in the level of total reserves held by the Social Security and HI Trust Funds.

Both programs will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment and, in the case of Medicare, to growth in expenditures per beneficiary exceeding growth in per capita GDP.

In later years, projected costs expressed as a share of GDP trend up slowly for Medicare and are relatively flat for Social Security, reflecting slower growth in per-beneficiary health care costs and very gradual population aging caused by increasing longevity.

Social Security

Social Security’s Disability Insurance (DI) program satisfies neither the Trustees’ long-range test of close actuarial balance nor their short-range test of financial adequacy and faces the most immediate financing shortfall of any of the separate trust funds. DI Trust Fund reserves expressed as a percent of annual cost (the trust fund ratio) declined to 62 percent at the beginning of 2014, and the Trustees project trust fund depletion late in 2016, the same year projected in the last Trustees Report.

DI costs have exceeded non-interest income since 2005 and the trust fund ratio has declined in every year since peaking in 2003. While legislation is needed to address all of Social Security’s financial imbalances, the need has become most urgent with respect to the program’s disability insurance component. Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016.

To summarize overall Social Security finances, the Trustees have traditionally emphasized the financial status of the theoretical combined trust funds for DI and for Old Age and Survivors Insurance (OASI). The combined trust funds, and expenditures that can be financed in the context of the combined trust funds, are theoretical constructs because there is no legal authority to finance one program’s expenditures with the other program’s taxes or reserves.

Social Security’s total expenditures have exceeded non-interest income of its combined trust funds since 2010 and the Trustees estimate that Social Security cost will exceed non-interest income throughout the 75-year projection period.

The Trustees project that this annual cash-flow deficit will average about $77 billion between 2014 and 2018 before rising steeply as income growth slows to its sustainable trend rate after the economic recovery is complete while the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers.

Redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security’s annual aggregate cash-flow deficits. Since the cash-flow deficit will be less than interest earnings through 2019, reserves of the combined trust funds will continue to grow but not by enough to prevent the ratio of reserves to one year’s projected cost (the combined trust fund ratio) from declining. (This ratio peaked in 2008, declined through 2013, and is expected to decline steadily in future years.)

 

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After 2019, Treasury will redeem trust fund asset reserves to the extent that program cost exceeds tax revenue and interest earnings until depletion of combined trust fund reserves in 2033, the same year projected in last year’s Trustees Report. Thereafter, tax income would be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2088.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable earnings will grow rapidly from 11.3 percent in 2007, the last pre-recession year, to roughly 17.1 percent in 2037, and will then decline slightly before slowly increasing after 2050.

Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled 4.1 percent of GDP in 2007, and the Trustees project these costs will increase to 6.2 percent of GDP for 2037, then decline to about 6.0 percent of GDP by 2050, and thereafter rise slowly reaching 6.1 percent by 2088.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.88 percent of taxable payroll, up from 2.72 percent projected in last year’s report.

This deficit amounts to 22 percent of program non-interest income or 17 percent of program cost. A 0.06 percentage point increase in the OASDI actuarial deficit would have been expected if nothing had changed other than the one-year extension of the valuation period to 2088.

The effects of recently enacted legislation, updated demographic and economic data, and improved methodologies on net worsened the actuarial deficit by 0.10 percent of taxable payroll.

While the theoretical combined OASDI Trust Fund fails the long-range test of close actuarial balance, it does satisfy the test for short-range (10-year) financial adequacy. The Trustees project that the combined trust fund asset reserves at he beginning of each year will exceed that year’s projected cost through 2027.

Medicare

The Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be the next to face depletion after the DI Trust Fund. The projected date of HI Trust Fund depletion is 2030, four years later than projected in last year’s report. At that time dedicated revenues will be sufficient to pay 85 percent of HI costs.

The Trustees project that the share of HI cost that can be financed with HI dedicated revenues will decline slowly to 75 percent in 2047, and will then stay about flat. HI non-interest income less HI expenditures is projected to be negative this year (as it has been in every year since 2008), and then turn positive for six years (2015-2020) before turning negative again in 2021.

The projected HI Trust Fund’s long-term actuarial imbalance is smaller than that of the combined Social Security trust funds under the assumptions employed in this report. The estimated 75-year actuarial deficit in the HI Trust Fund is 0.87 percent of taxable payroll, down from 1.11 percent projected in last year’s report.

The HI fund again fails the test of short-range financial adequacy, as its trust fund ratio is already below 100 percent and is expected to decline continuously until reserve depletion in 2030. The fund also continues to fail the long-range test of close actuarial balance. The HI 75-year actuarial imbalance amounts to 23 percent of tax receipts or 19 percent of program cost.

The improvement in the outlook for HI long-term finances is principally due to lower-than-expected spending in 2013 for most HI service categories, which reduced the base period expenditure level about 1.5 percent and contributed to the Trustees’ decision to reduce projected near-term spending growth trends. Taken together, these changes lowered the actuarial deficit by about 0.29 percent of taxable payroll. Other changes resulted in an increase in the actuarial deficit of 0.05 percent.

Unlike in past years, the Medicare Part B cost projection featured in this report and summarized below (the “projected baseline”) assumes that reductions in Medicare payment rates for physician services called for by the Sustainable Growth Rate (SGR) formula will be overridden in the future as they have been from January 2003 through March 2015.

Specifically, the projected baseline assumes that physician payment rates will remain at their current levels through the end of 2015, and will then rise at the same rate currently slated for the 10-year period ending March 31, 2015 (0.6 percent annually) through 2023. Relative to the current-law projection featured in the 2013 report, this change in the conceptual basis for the baseline projection raises the growth rate of projected Part B costs by about 0.3 percentage points on average over the next 75 years.

While legislation overriding physician fee reductions has in recent years included provisions offsetting the 10-year cost of the overrides, the division of those offsets between Medicare savings and savings in other parts of the budget has varied. Because it is difficult to anticipate the extent to which policy makers will finance future overrides with other Medicare savings, the Medicare projected baseline does not include any offsets. This projection represents neither a legislative prediction nor a policy recommendation by the Trustees.

The Trustees project that Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D of SMI, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 1.9 percent of GDP in 2013 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.5 percent of GDP by 2088. General revenues will finance roughly three-quarters of these costs, and premiums paid by beneficiaries almost all of the remaining quarter. SMI also receives a small amount of financing from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.

The Trustees project that total Medicare costs (including both HI and SMI expenditures) will grow from approximately 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035 and will increase gradually thereafter to about 6.9 percent of GDP by 2088.

In recent years U.S. national health expenditure (NHE) growth has slowed relative to historical patterns. There is uncertainty regarding the extent to which this slowdown in the rate of cost growth reflects one-time effects of the recent economic downturn and other non-persistent factors or structural changes in the health care sector that may produce additional cost savings in the years ahead.

The Trustees are hopeful that U.S. health care practices are in the process of becoming more efficient as providers anticipate a future in which the rapid cost growth rates of previous decades, in both the public and private sectors, do not return. Indeed, the Trustees have revised down their projections for near-term Medicare expenditure growth in response to the recent favorable experience.

In addition, the methodology for projecting Medicare finances had already assumed a substantial long-term reduction in per capita health expenditure growth rates relative to historical experience, to which the Affordable Care Act’s cost-reduction provisions would add substantial further savings. Notwithstanding recent favorable developments, both the projected baseline and current law projections indicate that Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation. Such legislation should be enacted sooner rather than later to minimize the impact on beneficiaries, providers, and taxpayers.

Conclusion

Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.

By the Trustees:

Jacob J. Lew, Secretary of the Treasury, and Managing Trustee of the Trust Funds.

Sylvia M. Burwell, Secretary of Health and Human Services, and Trustee.

Charles P. Blahous III, Trustee.

Thomas E. Perez, Secretary of Labor, and Trustee.

Carolyn W. Colvin, Acting Commissioner of Social Security, and Trustee.

Robert D. Reischauer, Trustee.

 

 

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