2012 Treasury Report on Social Security & Medicare

I.  Introduction.  Treasury’s 2012 Report to Congress on the financial health of Social Security and Medicare emphasized that Americans are living longer and that the number of retirees is growing. This is placing pressure on Social Security, which is projected to have sufficient funds until 2033, and also on Medicare’s Hospital Insurance Trust, which is expected to have sufficient resources until 2024.

The projections are more pessimistic than those of the previous year, since there was an increase in the “actuarial imbalance” of 0.6 percent due to changes in cost projection methods. The Report noted that a major reform that will place these programs on a “sounder national footing” is the full implementation of the Affordable Care Act. This may be accomplished by (i) eliminating “excessive subsidies” to drug companies; (ii) creating ““new incentives” for doctors and hospitals, and (iii) “asking” the wealthiest seniors to pay more.

The Report also noted that President Obama is committed to keeping Social Security strong for future generations, recognizing that more private employers are “mov[ing] away” from defined benefit plans. The “solution” for Social Security involves “finding a bipartisan solution that does not hurt current recipients, slash benefits for future generations, or tie the program to the stock market.”

The Report found that long-term Medicare costs increased by reason of cost growth rate assumptions. Similarly, the actuarial deficit in Social Security increased due to updated economic data and assumptions. Since both programs cannot maintain projected long-term costs under current financing, the Report emphasized the importance of Congress acting “sooner rather than later” to phase in changes so that the public “has adequate time to prepare.”

Noting that Social Security and Medicare account for 36 percent of all federal expenditures, the Report also predicted that the influx of baby-boomers into the programs will, through the 2030’s, result in program costs exceeding GDP. Thereafter, increased longevity and increased health care costs would cause program costs to increase only “somewhat more rapidly” than GDP.

II.      Social Security

Social Security expenditures exceeded non-interest income in 2010 and 2011 for the first time since 1983, and the imbalance is expected to continue over the 75-year projection period. Redemption of trust fund assets from the General Fund of the Treasury is expected to offset such annual cash-flow deficits in the near term. Since the redemptions will be less than the interest earnings through 2020, nominal trust fund balances should continue to grow.

The trust fund ratio, an indicia of the number of years the program could be funded with current trust fund reserves, peaked in 2008, declined in 2011, and is expected to decline in future years. After 2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033. Thereafter, tax income would be sufficient to pay only three-fourths of scheduled benefits through 2086.

The temporary reduction in the Social Security payroll tax rate reduced payroll tax revenues by $215 billion in 2011 and 2012. However, that reduction was offset by providing for transfers from the general fund to trust funds. Under current projections, the annual cost of Social Security benefits expressed as a percentage of worker’s taxable income will grow rapidly from 11.3 percent in 2007 to about 17.4 percent in 2035, and then decline slightly after 2050.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds was 2.67 percent of taxable payroll, up from 2.22 percent in 2011. This is the largest actuarial deficit reported since prior to 1983, and the largest single-year deterioration in the actuarial deficit since 1994. While the combined OASDI program continues to fail the long-range test of actuarial balance, the combined trust fund assets will exceed one year’s projected cost through 2027.

However, the Disability Insurance program fails both the actuarial deficit test and the long-range test for financial solvency: The Report concluded that without Congressional action, trust fund exhaustion will occur in 2016, two years earlier than previously projected.

III.     Medicare

The Medicare Hospital Insurance (HI) Trust Fund faces depletion earlier than the Social Security Trust fund, although not as soon as the Disability Trust Fund. The long-term actuarial imbalance of HI Medicare is less than that of Social Security. Medicare costs are projected to grow from the rate of 3.7 percent of GDP to 5.7 percent of GDP by 2035, and to 6.7 percent of GDP by 2086. The projected 75-year actuarial imbalance of the HI Trust Fund is 1.35 percent of taxable payroll, up from 0.79 percent in the 2011 Report. The HI Trust Fund fails the test of short-term solvency, since projected costs are less than projected expenditures, and are expected to continue declining.

Viewed in long-term perspective, the HI Trust Fund is projected to pay out more in hospital benefits and other expenditures than it receives in income, as it has since 2008. The projected date of HI Trust Fund Exhaustion is 2024, the same date as in the 2012 Report. Once the HI Trust Fund is exhausted, dedicated revenues would be sufficient to pay 87 percent of HI Trust Fund costs. The Report concluded that the worsening in long-term HI finances is principally due to the adoption of changes in assumptions recommended by the 2010-11 Medicare Technical Review Panel, which increases the projected long-range annual growth rate of Medicare costs by 0.3 percent.

The Report projected that Part B of Supplemental Medical Insurance (SMI), which funds doctors’ bills and other outpatient expenses, as well as Part D, which provides funds for prescription drug coverage, will remain adequately financed into the future because current law has a built-in feature that provides financing for the following year’s expenses. Nevertheless, the Report noted that the aging population and rising health care costs will result in the projected costs of SMI to  grow from 2.0 percent of GDP in 2011 to approximately 3.4 percent of GDP in 2035, and then more slowly to 4.0 percent of GDP by 2086. General revenues are expected to finance about three-quarters of this cost. Premiums paid by beneficiaries are expected to cover the remaining quarter of the cost. SMI also receives some financing from the States and from drug manufacturers.

IV.   Impact of the Affordable Care Act

The Report found that Medicare costs projected over 75 years are substantially lower than they would otherwise be because of the Affordable Care Act. Most of the annual 1.1 percent in cost-savings is attributable to a reduction in annual payments for most Medicare services (other than physicians’ services and drugs). The Report cautions that maintaining the annual percentage reduction in Medicare costs will be contingent on the permanent adoption of “efficiency-enhancing innovations in health care delivery systems.” The Report also assumes that a planned 31 percent reduction in Medicare payment rates for physician services, required under the law, but which is “highly uncertain,” will actually occur.

V.     Conclusion

The Treasury Report concluded that the decline in Social Security and Medicare HI Trust Fund will place “mounting pressure” on the Federal budget. For the sixth consecutive year, the Trustees, pursuant to the Social Security Act, issued a “Medicare funding warning,” since projected non-dedicated sources of revenues, principally general revenues, are expected to exceed 45 percent of total Medicare outlays. This threshold was first breached in 2010. Treasury implored Congress to address the problems facing Social Security and Medicare as soon as possible, in order to provide more options and provide the public with adequate time to prepare for the changes.

President Obama, together with Congress, corrected the decades-long failure of Washington to provide the assurance of health care to all Americans. The Affordable Care Act now compliments Social Security and Medicare. Together, these programs have the potential to fulfill the promise made by the federal government to working Americans that their contribution to Social Security and Medicare will ensure that they receive the resources necessary to enable them to remain healthy and productive in their retirement years. For this promise to be kept, the work of President Obama and of Congress must continue. Washington must succeed in its efforts to ensure that Social Security and Medicare remain viable. One measure of the viability of these programs are the projected dates at which the programs will become insolvent. Of late, those dates have become alarmingly close.