Social Security, Medicare to run out sooner
Revision in trustees' annual report considered small, based on changes in interest rate and demographic assumptions.
NEW YORK (CNNMoney.com) - The trustees of Social Security and Medicare now estimate that the Social Security trust fund will be exhausted in 2040 while the Medicare trust fund will be depleted in 2018, slightly sooner than previously forecast.
Those projections are part of the trustees' 2006 annual report, which was released Monday afternoon, roughly a month after its original due date.
In their annual report last year, the trustees estimated the trust fund for Social Security would run out by 2041 and the one for Medicare in 2020.
A change of a year or two in trust fund exhaustion estimates isn't considered significant because it reflects small adjustments in long-term averages that are made based on the latest economic factors, including the rise or fall in interest rates, wage growth and inflation. This year, for example, the trustees assumed a slightly lower real interest rate and a slightly increased long-term fertility rate.
The term "trust fund exhaustion" does not mean that there are no funds available - rather, it means that the system will be able to pay out only a percentage of promised benefits.
By 2040, for instance, the trustees estimate Social Security will be able to pay out only 74 percent of benefits currently promised. By 2018, Medicare will be able to pay out 80 percent of estimated expenditures.
The report also estimates, as it did last year, that come 2017 Social Security will no longer be taking in enough payroll tax to pay all promised benefits and will need to tap the special-issue bonds that make up its trust fund. In order to make good on repaying those bonds, the federal government will have to borrow more money, raise taxes, cut spending elsewhere or reduce benefits.
Medicare, meanwhile, is expected to pay out more in benefits than it receives in tax revenue starting this year.
Social Security and Medicare are funded by taxes taken out of salaries and wages. Workers pay 6.2 percent for Social Security up to $94,200 in earnings and another 1.45 percent for Medicare on all of their earnings. Their employers then match those amounts. (The self-employed pay 15.3 percent of earnings for both programs, but then get to deduct the employer portion on their tax return.)
The debate over how to make Social Security solvent for the long-term has been put on hold, while the debate over how to address the larger and more immediate shortfalls in Medicare hasn't begun in earnest in Washington. But it's highly likely corrective measures will include one or both of the following: tax increases and benefit reductions.
The trustees estimate that the long-term shortfall of Social Security over the next 75 years will be $4.6 trillion.
While that is a big number, it's easier to understand the scope of the shortfall this way: In order to keep Social Security solvent over the next 75 years, the payroll tax for Social Security – currently 12. 4 percent -- would need to be increased by 2.02 percentage points.
Over what is called the "infinite time horizon," the trustees estimate the Social Security shortfall is $13.4 trillion. But actuaries say estimates over an infinite horizon have little value to policymakers. "Many observers question the reliability or usefulness of calculating Social Security's unfunded obligation over 75 years. Calculations over an infinite period are even less reliable," a report from the nonpartisan American Academy of Actuaries noted.
Throughout 2005, President Bush called for Social Security reform that would give younger workers the option of creating individual investment accounts in which they could invest some of their Social Security taxes. If they did, their Social Security benefits would be reduced by a formula tied to the amount of money they redirected to their accounts.
Among the advantages, proponents say, are the possibility of better returns and ownership of the assets. Critics say such accounts take the "social" and the "security" out of Social Security.
What both agree on, even the White House, is that individual accounts won't make Social Security solvent. Indeed, a key proposal supported by Bush seeks to lower starting benefits of middle and high-income workers.