Monday, April 23, 2007

Social Security and Medicare Outlook

Today the 2007 reports on the Social Security and Medicare programs were released. For a summary, see the Status of the Social Security and Medicare Programs.

One of the most interesting things about the report is the contrast between the status of the two programs. From the summary:
The financial condition of the Social Security and Medicare programs remains problematic; we believe their currently projected long run growth rates are not sustainable under current financing arrangements.

Social Security

Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 75 percent of scheduled annual benefits in 2041, when the combined OASDI Trust Fund is projected to be exhausted. Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues or an immediate reduction in benefits of 13 percent or some combination of the two.


As we reported last year, Medicare's financial difficulties come sooner-and are much more severe-than those confronting Social Security. While both programs face demographic challenges, the impact is greater for Medicare because health care costs increase at older ages.

...The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is now 3.55 percent of taxable payroll, up slightly from 3.51 percent in last year's report... The projected date of HI Trust Fund exhaustion is 2019, one year later than in last year's report, when tax income will be sufficient to pay only 79 percent of HI costs. HI tax income falls short of outlays in this and all future years. The program could be brought into actuarial balance over the next 75 years by an immediate 122 percent increase in the payroll tax, or an immediate 51 percent reduction in program outlays or some combination of the two.
Yes, you read that correctly. The SS program will only be able to cover about three-fourths of its expenses by the year 2041; the Medicare program will reach almost the same point in 2019. Fixing the SS shortfall would require a 16 percent increase in payroll taxes; fixing the Medicare shortfall would require a 122 percent increase in payroll taxes.

My favorite picture (little changed from last year's picture) from the report tells the same story graphically. The light blue bits are the SS shortfall. The other two colors represent the Medicare shortfall (broken down into the prescription drug benefit and the rest of Medicare).

It's getting to the point where the two problems are not even of the same order of magnitude. (Not literally, but you get my meaning.)

There's one other picture that I find illuminating from the SS report. It's the one that shows the SS trust fund balances under different assumptions: "high cost" (III), "intermediate" (II) and "low cost" (I) scenarios.

According to the "low cost" scenario, there's no SS problem, and even something between scenarios I and II could well result in the SS problem being a rather minor issue.

In case you're curious to know what separates these three scenarios, I've put together a table showing the specific assumptions underlying each scenario, compared with historical experience for each variable.

Based on historical experience, it seems reasonably safe to me to suppose that the "high cost" scenario is not very likely. (Yes, it's possible, but not likely.) It also seems to me that the "intermediate" scenario is probably a bit on the conservative side - by which I mean that it is slightly more pessimistic than one might expect - which may well be appropriate in this case.

But given the enormous variation in the outcomes one gets depending on the assumptions one makes, the main point I take from this is not to get too worked up about these long run projections - there's a good chance that they could be substantially wrong, and the problem really could just go away on its own.

The Social Security problem, that is. With Medicare, there are virtually no reasonable assumptions that one can make that make the problem go away.

Finally, it's worth noting one last interesting detail. From the summary:
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 requires that the Medicare Report include a determination of whether the difference between total Medicare outlays and dedicated financing (such as premiums and payroll taxes) exceeds 45 percent of total outlays within the first 7 years of the projection period (2007-2013 for the 2007 Report). The Act requires that an affirmative determination in two consecutive reports be treated as a "funding warning" for Medicare that would, in turn, require a Presidential proposal to respond to the warning and expedited Congressional consideration of such proposal. The 2007 Report projects that the difference will surpass 45 percent in 2013 and therefore makes a determination of excess general revenue funding. Because the 2006 report also made such a determination, a "Medicare funding warning" is hereby triggered that requires the President to propose legislation that responds to this warning within 15 days of the submission of the Fiscal Year 2009 budget and for Congress to consider the proposal on an expedited basis. This requirement will help call additional attention to Medicare's impact on the Federal budget.
President Bush must, by law, propose legislation that at least attempts to address the Medicare problem with his next budget, next January. So after six years of ignoring the problem (and in fact making it far worse, thanks to the prescription drug benefit he championed without thinking about how to pay for it), Bush must finally go on record with how he thinks the problem should be solved.


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