Social Security, Medicare report card on tap

@CNNMoney April 20, 2012: 5:08 AM ET
Social Security, Medicare report card on tap

NEW YORK (CNNMoney) -- Critical to reining in the United States' long-term debt will be finding ways to control the burgeoning costs of Medicare and Social Security, both of which will face serious funding shortfalls over the next two decades.

On Monday, the trustees of those programs will offer their annual update on just when those shortfalls will occur.

Experts said they expect the trustees' conclusions to be similar to their findings last year.

Then again, "It's like trying to predict elections. You never know," said Don Fuerst, senior pension fellow at the American Academy of Actuaries.

Last year, the trustees projected Social Security could pay promised benefits in full through 2036, after which the program could only afford to pay 77% of them.

Social Security has already begun paying out more in benefits than it takes in from workers' payroll taxes.

But the difference has been made up for with interest paid by the Treasury on the $2.6 trillion that the federal government owes the program. That debt represents the amount of extra revenue paid into the system over the years that Uncle Sam borrowed and spent.

In order for Social Security to remain fully solvent over the next 75 years, policymakers in theory could do one of three things, the trustees said last year:

  • Immediately jack up the payroll tax to 14.55%. Workers and their employers currently pay 12.4% (6.2% each) on the first $110,100 in wages.
  • Cut benefits by 13.8%
  • Or some combination of the two.

In reality, an immediate benefit cut or tax increase is not politically palatable nor practical. Budget experts who have proposed ways to reform the program have suggested more gradual changes in ways that do not affect anyone in or near retirement.

They've also proposed to gradually increase the retirement age and the amount of income subject to the payroll tax.

As for Medicare, the trustees last year noted that it faces a more immediate funding shortfall than Social Security, although the new health reform law improved the program's long-term outlook.

Still, the long-range improvement is based on certain policy changes -- such as scheduled payment cuts to Medicare doctors -- even though they are not considered likely.

The trustees estimated that Medicare's hospital insurance program, known as Part A, which is financed primarily through payroll taxes, should be able to pay full benefits through 2024, after which it could foot only 90% of hospital costs. By 2045, that share is estimated to drop to 75% before gradually climbing back up.

Were Congress to make the hospital insurance program solvent overnight, the trustees last year estimated that they would have to raise the 2.9% Medicare tax on all wages to 3.69% immediately.

But that doesn't give a complete sense of the funding shortfalls in Medicare.

Seniors wishing to enroll in Medicare Part B (for doctor visits) and Part D (for prescription drugs) pay premiums, but those cover only about 25% of the costs, according to the Congressional Research Service.

The rest of the financing comes primarily from the government's general tax revenue. And the share of Medicare costs that revenue will cover is expected to grow in the coming years, as enrollment in the program soars and spending per enrollee jumps in the next decade.

Even if the trustees' estimates improve slightly on Monday, "the bottom line is Medicare still faces a long-term funding problem," said Cori Uccello, senior health fellow at the American Academy of Actuaries.

The Congressional Budget Office has estimated that barring a reduction in health care costs and structural changes to the program, Medicare spending as a percent of GDP is likely to more than double in the next 40 years and triple over the next 75.

The trustees' report will be delivered amidst stunningly dysfunctional budget dealings on Capitol Hill.

Such dysfunction is a key reason why Congress is expected to punt on $7 trillion worth of fiscal decisions this election year -- a decision on the expiring Bush tax cuts, for example, and a series of blunt spending cuts agreed to during last year's debt ceiling debate, but which everyone acknowledges is terrible policy.

The report also comes as Republicans are pushing a Medicare reform plan based in large part though not entirely on a proposal that House Budget Chairman Paul Ryan worked on with Sen. Ron Wyden, a Democrat. But many Democrats deride Ryan's plan as an end to the Medicare guarantee.

Throw the politically sensitive issue of Social Security in the mix and one thing is certain: the trustees' conclusions will likely spawn more of a rhetorical firestorm than a serious bipartisan policy debate. To top of page

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