New Trustees Reports Show Continuing Financial Challenges 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. The 2015 reports, released on July 22, 2015, show that, despite some encouraging signs, both programs
continue to face financial challenges that should be addressed as soon as possible, with the Disability Insurance Trust
Fund needing the most urgent attention.
What
are the Social Security trust funds?
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; disabled workers and their families receive monthly
benefits under the Disability Insurance (DI) program. The combined programs
are referred to as OASDI. Each program
has a financial account (a trust fund) that holds the Social Security payroll
taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General
Fund of the Treasury and income tax revenue from benefit taxation) is also deposited
in these accounts. Money that is not needed in the current year to pay benefits
and administrative costs is invested (by law) in special Treasury bonds that
are guaranteed by the U.S. government and earn interest. As a result, the
Social Security trust funds have built up reserves that can be used to cover
benefit obligations if payroll tax income is insufficient to pay full benefits.
(Note that the Trustees provide certain projections
based on the combined OASI and DI (OASDI) trust funds. However, these
projections are theoretical, because the trusts are separate, and one program's
taxes and reserves cannot be used to fund the other program.)
Trustees
report highlights: Social Security
· The
combined trust fund reserves (OASDI) are still increasing and will continue to
do so through 2019 (asset reserves increased by $25 billion in 2014, with
year-end reserves totaling $2.8 trillion). Not until 2020, when annual program
costs are projected to exceed total income, will the U.S. Treasury need to
start withdrawing from reserves to help pay benefits. Absent congressional
action, the combined trust fund
reserves will be depleted in 2034, one
year later than projected in last year's report.
· Once
the combined trust fund reserves are depleted, payroll tax revenue alone should
still be sufficient to pay about 79% of scheduled benefits in 2034, with the
percentage falling gradually to 73% by 2089. This means that 20 years from now,
if no changes are made, beneficiaries could receive a benefit that is about 21%
less than expected.
· The
OASI Trust Fund, when considered separately, is projected to be depleted in
2035 (one
year later than projected in last year's report). At that time, payroll tax
revenue alone would be sufficient to pay
77% of scheduled OASI benefits.
· The DI Trust
Fund is in worse shape and will be depleted in late 2016 (the same as projected
last year). The Trustees noted that the DI Trust Fund "now faces an urgent
threat of reserve depletion, requiring prompt corrective action by lawmakers if
sudden reductions or interruptions in benefit payments are to be
avoided." Once the DI Trust Fund is
depleted, payroll tax revenue alone would be sufficient to pay just 81% of
scheduled benefits.
· Based
on the "intermediate" assumptions in this year's Trustees report, the Social Security Administration is
projecting that there will be no cost-of-living adjustment (COLA) for calendar
year 2016.
What
are the Medicare trust funds?
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 helps pay for physician
and outpatient costs) and one covering Medicare Part D (which helps cover the
prescription drug benefit).
Trustees
report highlights: Medicare
· Annual
costs for the Medicare program have exceeded tax income
annually since 2008, and will continue to do so this year and next, before
turning positive for four years (2017-2020) and then turning negative again in
2021.
· The HI
Trust Fund is projected to be depleted in 2030
(unchanged from last year, but with an improved long-term outlook from last
year's report). Once the HI Trust Fund is depleted, tax and premium income would
still cover 86% of program costs under current law. The Centers for Medicare
& Medicaid Services (CMS) has noted that, under this year's projection, the
HI Trust Fund will remain solvent 13 years longer than the Trustees predicted
in 2009, before passage of the Affordable Care Act.
· Due to
increasing costs, a Part B premium increase is likely in 2016. However, about
70% of Medicare beneficiaries will escape the increase because of a so-called
"hold harmless" provision in the law that prohibits a premium increase
for certain beneficiaries if there is no corresponding cost-of-living increase
in Social Security benefits. If there is no COLA for 2016, the increased costs
may be passed along only to the remaining 30% not eligible for this
hold-harmless provision--generally, new enrollees, wealthier beneficiaries, and
those who choose not to have their premiums deducted from their Social Security
benefit. If so, these individuals could see the base premium rise to $159.30 in
2016, up sharply from $104.90 in 2015.
Why
are Social Security and Medicare facing financial
challenges?
Social Security and Medicare accounted for 42% of
federal program expenditures in fiscal year 2014. These programs 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
reach retirement age, Americans live longer, and health-care costs rise.
What
is being done to address these challenges?
Both reports urge Congress to address the financial
challenges facing these programs 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, "Social Security's and
Medicare's projected long-range costs are not sustainable with currently scheduled
financing
and will require legislative action to avoid disruptive
consequences for beneficiaries and taxpayers."
Some long-term Social Security reform proposals on the
table are:
· Raising
the current Social Security payroll tax rate
· (according
to this year's report, an immediate and permanent payroll tax increase of 2.62
percentage points would be necessary to address the revenue shortfall)
· Raising
the ceiling on wages currently subject
to Social Security payroll taxes ($118,500 in 2015)
· Raising
the full retirement age beyond the
currently scheduled age of 67 (for anyone born in 1960 or later)
· Reducing
future benefits, especially for wealthier beneficiaries
· Changing
the benefit formula that is used to calculate benefits
· Changing
how the annual cost-of-living adjustment for benefits is calculated
Regardless of the long-term solutions, Congress needs to
act quickly to address the DI program's imminent reserve depletion. According
to this year's report, in the short term, lawmakers may reallocate the payroll
tax rate between OASI and DI (as they did in 1994). However, this may only
serve to delay DI and OASI reforms.
You can view a combined summary of the 2015 Social
Security and Medicare Trustees reports at www.socialsecurity.gov/OACT/TRSUM/.
You can also access a full copy of the Social Security report from that page.
You can find the full Medicare report at
www.cms.gov.
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