New data on the solvency of Social Security and Medicare trust funds (2012)

Reports Show Challenging Financial Outlook for Social Security and Medicare

Every year, the Trustees of the Social Security and Medicare Trust Funds release reports to Congress on the current financial condition and projected financial outlook of these programs. This year’s reports, released on April 23, 2012, show that both programs face urgent financial challenges that should be addressed as soon as possible.

Why are Social Security and Medicare facing financial challenges?

Social Security and Medicare are the two largest public benefit programs in the United States and are funded primarily through the collection of payroll taxes. Partly because of demographics and partly because of economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on the trust funds is also worsening as large numbers of baby boomers hit retirement age and Americans live longer.

Trustees report highlights: Social Security

The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program, while disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. This year’s trustees report shows that:

• The annual costs for the OASDI program already exceed income from the payroll tax. In 2011, the deficit was $148 billion, and the projected deficit for 2012 is $165 billion. However, these deficits are partly due to the payroll tax reduction legislation that reduced payroll taxes for employees and self-employed individuals by 2% for 2011 and 2012, and will partly be made up for by general revenue reimbursements from the General Fund of the Treasury. The 2011 deficit is therefore reduced to $45 billion, while the projected 2012 deficit is $53 billion.
• The combined assets of the OASDI Trust Funds will be exhausted in 2033. The DI Trust Fund is in worse shape and becomes exhausted in 2016 (two years earlier than projected last year), while the OASI Trust Fund becomes exhausted in 2035 (three years earlier than projected last year).
• Over the long term (a 75-year projection period), the Trust Funds would require additional revenue equivalent to $8.6 trillion in present value dollars to pay all scheduled benefits.

You can view the Social Security Board of Trustees Report at www.socialsecurity.gov.

Trustees report highlights: Medicare

There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which pays for physician and outpatient costs) and one covering Medicare Part D (which covers the prescription drug benefit). According to this year’s trustees report:

• Annual costs for the Medicare program have exceeded tax income annually since 2008, and will continue to do so in the foreseeable future. The report also notes that the future costs projected in this year’s report are likely to be underestimated, due to changes in law that are likely to occur.
• The HI Trust Fund is projected to be exhausted in 2024 (the same date as projected last year). However, the report states that this is due to cost-saving provisions of the Affordable Care Act. Otherwise, the HI Trust Fund would be exhausted several years earlier.
• Over the long term (a 75-year projection period), the actuarial deficit for the HI Trust Fund increased from 0.79% of taxable payroll (shown in last year’s report) to 1.35% of taxable payroll. However, under alternative projections, the HI actuarial deficit is even worse–2.43% of taxable payroll. (The actuarial deficit is basically the difference between annual income and costs expressed as a percentage of taxable payroll.)

You can view the Medicare Board of Trustees Report at the actuarial studies page at www.cms.gov. You can also view this report, as well as a combined summary of the Social Security and Medicare trustees reports at www.socialsecurity.gov.

What does the future hold?

Both the Social Security and Medicare trustees reports make it clear that these challenges aren’t going away. Costs are projected to grow substantially in the coming decades. Both reports urge Congress to address the financial challenges in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. As the Social Security Board of Trustees report states, “Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.”