Medicare funding runs short by 2024, trustees say

@CNNMoney April 23, 2012: 6:25 PM ET

NEW YORK (CNNMoney) -- Highlighting the fiscal problems posed by growing health costs and an aging population, the trustees of the nation's main entitlement programs estimated Monday that Medicare will only be able to pay a portion of its expected costs starting in 2024.

That's the same year the trustees had estimated a year ago.

Their outlook for Social Security worsened somewhat.

Every year the trustees release an annual report on both programs' long-term financial outlook.

In this year's report, they said that unless Congress makes changes to Medicare, or overall health costs come down, Medicare will only be able to pay 87% of expected costs by 2024 and 67% by 2050.

Put another way, if lawmakers wanted to make the program solvent over the next 75 years, they would need to raise the 2.9% Medicare tax on all wages to 4.25%.

And that may be the best-case scenario, since the trustees' estimates assume that a scheduled cut in Medicare payments will go through, even though Congress regularly overrides it. Their numbers also assume that the cost-savings measures called for under the new health reform law will occur as predicted.

As it is, costs under Medicare Part A -- which pays for hospital services -- have outrun revenue coming into the program since 2008. The government has made up the difference by redeeming hospital trust fund assets and also by paying interest on other trust fund assets.

But by 2024, that trust fund source will run dry.

A separate trust fund for Medicare Part B (for doctor visits) and Part D (for prescription drugs) is adequately financed over the next decade, the trustees said, but only because premiums and general revenue income are adjusted annually to match expected costs.

Nevertheless, the financial position of Medicare overall was improved by the 2010 health reform law. Without it, the program would only be able to pay costs in full until 2016, said Health and Human Services Secretary Kathleen Sebelius, a Medicare trustee.

In terms of Social Security, the trustees estimated that the program will only be able to pay roughly 75% of promised benefits starting in 2033. That is three years' earlier than they predicted last year.

A key reason for the earlier date are changed assumptions about how much wages will grow over the next 75 years.

To give a sense of the magnitude of Social Security's fiscal shortfall, if lawmakers wanted to make the Social Security fully solvent over the next 75 years, they would need to immediately and permanently raise the payroll tax rate -- 12.4% on the first $110,100 of wages -- to 15.01%. Alternatively, they could cut benefits by 16.2%. Or adopt some combination of these changes. (See correction.)

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 Department on the $2.7 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.

"As we work to strengthen Social Security and Medicare, it is critical that reforms are slowly phased-in over time so current beneficiaries are not affected and future beneficiaries do not experience precipitous changes," Treasury Secretary Tim Geithner said.

Of course, the political firestorm over both programs -- and the federal budget generally -- doesn't show signs of abating anytime soon.

Liberal Democrats accuse Republicans of trying to end the Medicare guarantee, privatize Social Security and deny the cost-savings potential of the 2010 health reform law. To the extent that changes are made to entitlements, Democrats would prefer they lean more heavily on the tax side of the equation and hit the highest-income taxpayers first.

Conservative Republicans accuse Democrats of refusing to deal with fiscal challenges, have been calling for a full repeal of the health reform law and would prefer that changes to the entitlement programs lean most heavily on spending.

Independent budget experts, who warn about the unsustainable pressure entitlements will place on the federal budget, say both parties will have to compromise.

"Everyone may think their cow is sacred, but in fact there can be no sacred cow in the search for solutions," said Robert Bixby, executive director of the Concord Coalition.

Correction: An earlier version of this article incorrectly stated the increased payroll tax rate that would be required to make Social Security solvent for the long run. To top of page

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