Finances look worse for Medicare, Social Security

[May 14, 2011]  WASHINGTON (AP) -- The bad economy is worsening the already-shaky finances of Medicare and Social Security, draining the trust funds supporting them faster than expected and intensifying the need for Congress to shore up the massive benefit programs, the government said Friday.

Both Medicare and Social Security are being hit by a double whammy: the long-anticipated wave of retiring baby boomers and weaker-than-expected tax receipts, according to the annual report by the trustees who oversee the programs.

The Medicare hospital insurance fund for seniors is now projected to run out of money in 2024, five years earlier than last year's estimate. The Social Security trust funds are projected to be drained in 2036, one year earlier than the last estimate. Once the trust funds are exhausted, both programs can only collect enough money in payroll taxes to pay partial benefits, the report said.

More immediate bad news for seniors: After they've gone two years with no cost-of-living increase in Social Security payments, the trustees project a 0.7 percent increase for next year, a raise so small that it will probably be wiped out by higher Medicare Part B premiums for most beneficiaries.

"There can no longer be any doubt or denial: Our nation's Medicare and Social Security programs are unsustainable and will run out of money sooner than expected," said Senate Republican Leader Mitch McConnell of Kentucky.

Congress and the Obama administration are negotiating possible changes to Medicare and other benefit programs as part of a deal to increase the government's ability to borrow. The $14.3 trillion debt ceiling will be hit Monday, though Treasury officials are taking measures to put off an unprecedented default on government bonds until August, Treasury Secretary Timothy Geithner said.

Congress is putting off changes to Social Security, but Medicare, the government health insurance program for older Americans, is still on the table.

The longer Congress waits to fix the programs, the more likely it is that lawmakers will be forced to impose tax increases, deep benefit cuts, or both, to save them, the report said. By acting sooner, the trustees said Congress can impose gradual changes that reduce the impact on current beneficiaries and give future retirees time to prepare.

"The financial shortfalls confronting both Social Security and Medicare are substantial and -- absent legislation to correct them -- quite certain," wrote two of the trustees who oversee the programs, Charles P. Blahous III and Robert D. Reischauer. "Elected officials will best serve the interests of the public if financial corrections are enacted at the earliest practicable time."

The weak economy is hurting Medicare and Social Security because fewer people are working and paying payroll taxes that support the programs, the trustees said. Medicare is in worse shape than Social Security, in part because it is also being hit by rising health care costs.

To illustrate the challenges facing the programs, the trustees calculated the tax increases or benefit cuts that would be necessary to make both programs solvent for the next 75 years.

Fixing Social Security would require an increase in the payroll tax of 2.15 percentage points, or an immediate and permanent 14 percent cut in benefits, the report said. Fixing the Medicare hospital fund would require an increase in the payroll tax of nearly 1 percentage point, or a 17 percent cut in benefits.

If benefit cuts are designed to reduce the impact on current beneficiaries, future retirees will face even more significant changes, the report said.

On the other hand, if the Medicare trust fund is allowed to be drained, the program will collect only enough payroll taxes to pay about 90 percent of benefits. If the Social Security trust funds are drained, the program will collect only enough payroll taxes to pay about 77 percent of benefits, the report said.

Nearly 55 million retirees, disabled people and children who have lost parents receive Social Security benefits, which average $1,077 monthly. More than 46 million people are covered by Medicare.

Even after the economy comes back, Medicare will still be in trouble. Part of the reason is the cost of modern high-tech medicine. And people are living longer, and having complicated procedures such as bypass surgery and hip replacements later in life.

On top of that, financial projections for Medicare rely partly on assumptions that the trustees' report say are obviously unrealistic or questionable. Those include a 1990s law that would require a 30 percent cut in payments to doctors, and is routinely waived each year by Congress.

The report also raised questions about whether Medicare cuts under Obama's health care plan would be politically sustainable over the long haul.

"It is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report," the trustees said.

Six trustees oversee Social Security and Medicare. Besides Geithner, Blahous and Reischauer, the others are Labor Secretary Hilda Solis, Health and Human Services Secretary Kathleen Sebelius and Social Security Commissioner Michael Astrue.

[Associated Press; By STEPHEN OHLEMACHER and RICARDO ALONSO-ZALDIVAR]

Associated Press Economics Writer Martin Crutsinger contributed to this report.

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