The truth about Social Security and Medicare, straight from the trustees

[July 30, 2014]  By Mark Miller

CHICAGO (Reuters) - If you worry about the future of Social Security and Medicare, this is the week to get answers to your questions. The most authoritative annual reports on the long-term health of both programs were issued on Monday, and while the news was mixed, there are reasons to be encouraged about our two most important retirement programs.

Under the Social Security Act, a board of trustees reports annually to Congress on the status and long-term financial prospects of Social Security and Medicare. The reports are prepared by the professional actuaries who have made careers out of managing the numbers and are signed by three cabinet secretaries, the commissioner of Social Security and two publicly appointed trustees - one Republican, one Democrat.

Here are my five key takeaways from this year’s final word on our social insurance programs.

- Imminent collapse nowhere in sight. Social Security and Medicare face long-term financial problems, but there’s no cause for panic about either program.

Social Security’s retirement program is fully funded for the next 19 years. It has $2.8 trillion in reserves, and that figure will rise to $2.9 trillion in 2019, when the surplus funds will begin depleting rapidly as baby boomer retirements accelerate. Although you’ll often hear that Social Security spends more annually than it receives in taxes, the program actually took in $32 billion more than it spent last year, when interest on bond holdings and taxation of benefits are included.
 

The retirement trust fund will be depleted in 2034, at which point current revenue would be sufficient to pay only 77 percent of benefits - unless Congress enacts reforms to put the program back into long-term balance.

Medicare’s financial outlook improved a bit compared with last year’s report because of continued low healthcare inflation. The program’s Hospital Insurance trust fund - which finances Medicare Part A - is projected to run dry in 2030, four years later than last year’s forecast and 13 years later than forecast before passage of the Affordable Care Act (ACA).

In 2030, the hospital fund would have enough resources to cover just 85 percent of its expenditures. (Medicare’s other parts - outpatient and prescription drug services - are funded through beneficiary premiums and general revenue, so they don’t have trust funds at risk of running dry.)

Could healthcare inflation take off again? Certainly. Some analysts - and the White House - chalk up the recent cost-containment success to features of the ACA. But clouds on the horizon include higher utilization of healthcare, new medical technology and a doubling of enrollment by 2030 as boomers age.

- Medicare is delivering good pocketbook news. The monthly premium for Medicare Part B (outpatient services) is forecast to stay put at $104.90 for the third consecutive year in 2015. That means the premium won’t take a larger bite out of Social Security checks, and that retirees likely will be able to keep most - if not all - of the expected 1.5 percent cost-of-living adjustment (COLA) in benefits projected for next year. (Final numbers on Part B premiums and the Social Security COLA won’t be announced until this fall.)

- Social Security Disability Insurance (SSDI) requires immediate attention. The program faces a severe imbalance, and only has resources to pay full benefits only until 2016; if a fix isn’t implemented soon, benefits would be cut by 20 percent for nine million disabled people.

That can be avoided through a reallocation of a small portion of payroll tax revenues from the retirement to the disability program - just enough to keep SSDI going through 2033 while longer-range fixes to both programs are considered. Reallocations have been made at least six times in the past. Let’s get it done.

- Aging Americans aren’t gobbling up the economic pie. Social Security outlays equaled 4.9 percent of gross domestic product last year and will rise to 6.2 percent in 2035, when the last baby boomer is retired. Medicare accounted for 3.5 percent of GDP in 2013; it will be 3.7 percent of GDP in 2020 and 6.9 percent in 2088.

- Kicking the can is costly. There’s still time for reasonable fixes for Social Security and Medicare, but the fixes get tougher as we get closer to exhausting the programs’ trust funds.

Social Security will need new revenue. Public opinion polls show solid support for gradually eliminating the cap on income subject to payroll taxes (currently $117,000) and gradually raising payroll tax rates on employers and workers, to 7.2 percent from 6.2 percent. There’s also strong public support for bolstering benefits for low-income households and beefing up COLAs.

Medicare spending can be reduced without resorting to drastic reforms such as vouchers or higher eligibility ages. Billions could be saved by letting the federal government negotiate discounts on prescription drugs, and stepping up fraud prevention efforts. And an investigative series published earlier this summer by the Center for Public Integrity uncovered needed reforms of the Medicare Advantage program, pointing to “tens of billions of dollars in overcharges and other suspect billings” (http://bit.ly/1pRaj57).

Your move, Congress.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance. Editing by Douglas Royalty)

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