Analysis: Reforms needed to ensure sustainability of Social Security & Medicare

WTF Medicare & Social Security hp 4.24.12

Medicare and Social Security funds will face insolvency by 2024 and 2033, respectively, unless Congress promptly passes reforms to control costs and boost tax revenues to steer the programs to a more sustainable path.

The Social Security and Medicare Board of Trustees’ 2012 reports confirmed what many already know: the entitlement programs are running out of money to keep pace with the current level of benefits that millions of seniors and disabled Americans rely on to stay out of poverty. 

Demographic shifts drive deficits

Fundings for these social safety net programs are under pressure as more baby boomers are entering retirement age and Americans are living longer and, thus, receiving more aggregate benefits during their lifetime.

But even as entitlement spendings are being pushed higher by the demographic shifts, declining birthrates after the 1970s mean that there are fewer workers now contributing to the payroll taxes that fund Social Security and Medicare. The Great Recession has also reduced payroll taxes collected as companies laid off employees. In addition, this year’s trustees reports anticipate lowered wages in the future, which would further reduce the payroll tax revenues and widen the entitlement shortfalls.

In a nutshell, entitlement spendings are up but tax revenues are down. This is why Medicare and Social Security are facing bankruptcy in the coming decades unless Congress passes reforms to bridge the spending and revenue gap.

Social Security 

While Medicare’s fund depletion date would remain the same, the 2012 trustees reports showed that Social Security’s combined funds have worsened and will run out 3 years earlier than what was previously projected.

By 2033, Social Security’s funds will only have enough money to pay for 75% of the benefits currently received by millions of seniors, survivors of deceased workers, and disabled Americans. To sustain just the current level of benefits – without any cost of living adjustments to keep up with inflation – payroll taxes would have to be raised by 4.3%, from the current 12.4% to 16.7%, by 2033.

If Social Security benefits were completely eliminated today, then 14 million American seniors would be pushed into poverty, meaning that each person would be forced to live on less than $10,890 a year.

But most alarming is the news that Social Security’s disability fund will run out of money as soon as 2016. The disability benefits help those who cannot work because of serious or chronic health problems. Approximately 10 million Americans receive disability benefits from Social Security, according to Labor Secretary Hilda Solis.

One approach to address the imminent disability fund shortfall is “to re-allocate the tax rates between the disability and the retirement sides of Social Security,” said Charles Blahous, Social Security and Medicare programs’ public trustee. However, he pointed out, that option would “shore up disability only at the expense of the other Social Security trust fund.”

“If we want to avoid weakening the other side of Social Security, we’re going to have to make some tougher choices or we would otherwise have to decrease disability benefits or increase disability taxes considerably and fairly soon. We have to find roughly $30 billion of savings annually within the disability program starting within five years to prevent insolvency,” Blahous said.

Blahous emphasized that as time passes, the options to solve the Social Security shortfalls would narrow and lead to more drastic measures that would be painful to the recipients and disruptive to the economy.

Medicare

This year’s trustees reports projected that Medicare’s fund will not be able to meet existing obligations by 2024, which is in line with the previous year’s projections.

The silver lining is that the Affordable Care Act has substantially lowered Medicare’s projected 75-year costs by lowering reimbursements for some services, reducing over-payments to Medicare Advantage plans, deterring and preventing fraud, providing incentives to improve efficiency and effectiveness of health care, and increasing Medicare payroll tax rates by 0.9% – starting in 2013 – for individuals who earn more than $200,000 a year or couples who earn more than $250,000 a year.

“Without the health care law, the Hospital Insurance Trust Fund would be exhausted in 2016 – just 4 years from now,” said Health and Human Services Secretary Kathleen Sebelius. “But as a result of the law, we’ve added another 8 years to its life, putting Medicare on much more solid ground.”

However, a big part of the projected Medicare savings hinges on the 31% reduction of physicians’ fee reimbursements set to begin in 2013, which is unlikely to happen given that Congress has repeatedly passed the Medicare “doc fix” just before its expiration.

If the Affordable Care Act is struck down and Congress continues to extend the Medicare “doc fix”, then Medicare’s fund depletion could be accelerated.

“Over the longer run, the challenge facing Medicare will depend critically on our ability to adhere to the discipline contained in the Affordable Care Act, which in turn will return significant transformations of the existing payments of the delivery systems, the ability of the providers to improve their productivity, and the willingness of employers, unions and other payers of private policies to join forces with Medicare to demand change,” said Robert Reischauer, Social Security and Medicare programs’ public trustee. “Even with the unified and concerted effort, further major legislative changes above and beyond the Affordable Care Act will be required to put Medicare on a sustainable path.”

Treasury Secretary Timothy Geithner cautioned that reforms should be “balanced and even-handed” and slowly phased in to sustain existing benefit levels for current beneficiaries and avoid steep cuts for future retirees.

“We will not support proposals that sow the seeds to their destruction in the name of reform or that shift the costs of health care to seniors in order to sustain tax cuts for the most fortunate Americans,” Geithner said. “Social Security and Medicare are the twin pillars of retirement security in this country…These programs, which are rooted in the basic American sense of fairness and responsibility, have been supported across generations by both political parties in both Democratic and Republican administrations.”

 

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