Status of the Social Security and Medicare Programs in 2011

"An Informed Public Is the Greatest Weapon of Democracy"

Quote by ERWIN CHEMERINSKY, Professor of Constitutional Law and Political Science at USC

How Will Social Security and Medicare HI Costs Grow in Future Years in Relation to Taxable Earnings? Because the primary source of income for OASDI and HI is the payroll tax, it is customary to compare the programs’ non-interest income and costs expressed as percentages of taxable payroll, the “income rate” and “cost rate” shown in Chart B. Both the OASDI and HI annual cost rates increase over the long run from their 2010 levels (13.40 and 3.76 percent). Projected Social Security costs grow to 17.01 percent of taxable payroll by 2035, decline to 16.69 percent in 2050, and then rise gradually thereafter, reaching 17.56 percent in 2085. Medicare HI costs rise to 5.11 percent of taxable payroll in 2049 and level off thereafter under the intermediate assumptions employed in this report, with an ultimate cost rate of 4.90 in 2085. A link to to the full report is included below:

A SUMMARY OF THE 2011 ANNUAL REPORTS
Social Security and Medicare Boards of Trustees

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A MESSAGE TO THE PUBLIC:

Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2011 Annual Reports.

The financial conditions of the Social Security and Medicare programs remain challenging. Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative modifications if disruptive consequences for beneficiaries and taxpayers are to be avoided.

The long-run financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected have adequate time to prepare. Earlier action will also afford elected officials with a greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are already substantially dependent on program benefits.

Both Social Security and Medicare, the two largest federal programs, face substantial cost growth in the upcoming decades due to factors that include population aging as well as the growth in expenditures per beneficiary. Through the mid-2030s, due to the large baby-boom generation entering retirement and lower-birth-rate generations entering employment, population aging is the largest single factor contributing to cost growth in the two programs. Thereafter, the continued rapid growth in health care cost per beneficiary becomes the larger factor.

Social Security

Social Security expenditures exceeded the program’s non-interest income in 2010 for the first time since 1983. The $49 billion deficit last year (excluding interest income) and $46 billion projected deficit in 2011 are in large part due to the weakened economy and to downward income adjustments that correct for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink to about $20 billion for years 2012-2014 as the economy strengthens. After 2014, cash deficits are expected to grow rapidly as the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers. Through 2022, the annual cash deficits will be made up by redeeming trust fund assets from the General Fund of the Treasury. Because these redemptions will be less than interest earnings, trust fund balances will continue to grow. After 2022, trust fund assets will be redeemed in amounts that exceed interest earnings until trust fund reserves are exhausted in 2036, one year earlier than was projected last year. Thereafter, tax income would be sufficient to pay only about three-quarters of scheduled benefits through 2085.

Under current projections, the annual cost of Social Security benefits expressed as a share of workers’ taxable wages will grow rapidly from 11-1/2 percent in 2007, the last pre-recession year, to roughly 17 percent in 2035, and will then dip slightly before commencing a slow upward march after 2050. Costs display a slightly different pattern when expressed as a share of GDP. Program costs equaled roughly 4.2 percent of GDP in 2007, and are projected to increase gradually to 6.2 percent of GDP in 2035 and then decline to about 6.0 percent of GDP by 2050 and remain at about that level.

The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 2.22 percent of taxable payroll, up from 1.92 percent projected in last year’s report. This deficit amounts to 17 percent of tax receipts, and 14 percent of program outlays.

The 0.30 percentage point increase in the OASDI actuarial deficit and the one-year advance in the exhaustion date for the combined trust funds primarily reflects lower estimates for death rates at advanced ages, a slower economic recovery than was assumed last year, and the one-year advance of the valuation period from 2010-2084 to 2011-2085.

While the combined OASDI program continues to fail the long-range test of close actuarial balance, it does satisfy the conditions for short-range financial adequacy. Combined trust fund assets are projected to exceed one year’s projected benefit payments for more than ten years, through to 2035. However, the Disability Insurance (DI) program satisfies neither the long-range nor short-range tests for financial adequacy. DI costs have exceeded non-interest income since 2005 and trust fund exhaustion is projected for 2018; thus changes to improve the financial status of the DI program are needed soon.

Medicare

Relative to the combined Social Security Trust Funds, the Medicare HI Trust Fund faces a more immediate funding shortfall, though its longer term financial outlook is better under the assumptions employed in this report.

Medicare costs (including both HI and SMI expenditures) are projected to grow substantially from approximately 3.6 percent of GDP in 2010 to 5.5 percent of GDP by 2035, and to increase gradually thereafter to about 6.2 percent of GDP by 2085.

The projected 75-year actuarial deficit in the HI Trust Fund is 0.79 percent of taxable payroll, up from 0.66 percent projected in last year’s report. The HI fund fails the test of short-range financial adequacy, as projected assets drop below one year’s projected expenditures early in 2011. The fund also continues to fail the long-range test of close actuarial balance. Medicare’s HI Trust Fund is expected to pay out more in hospital benefits and other expenditures than it receives in income in all future years. The projected date of HI Trust Fund exhaustion is 2024, five years earlier than estimated in last year’s report, at which time dedicated revenues would be sufficient to pay 90 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 75 percent in 2045, and then to rise slowly, reaching 88 percent in 2085. Over 75 years, HI’s actuarial imbalance is estimated to be equivalent to 21 percent of tax receipts or 17 percent of program outlays.

The worsening of HI's projected finances is primarily due to lower HI real (inflation-adjusted) non-interest income caused by a slower assumed economic recovery, and by higher HI real costs caused by higher assumed near-term growth in real economy-wide average labor compensation. The resulting increases in HI real deficits are concentrated in the near term, which is why trust fund exhaustion occurs five years earlier than was projected last year despite a relatively modest increase in the 75-year actuarial deficit.

Part B of Supplementary Medical Insurance (SMI), which pays doctors’ bills and other outpatient expenses, and Part D, which provides access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population and rising health care costs will cause SMI costs to grow rapidly from 1.9 percent of GDP in 2010 to approximately 3.4 percent of GDP in 2035 and approximately 4.1 percent of GDP by 2085. Roughly three-quarters of these costs will be financed from general revenues and about one-quarter from premiums paid by beneficiaries. Small amounts of SMI financing are received from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.

Projected Medicare costs over 75 years are about 25 percent lower because of provisions in the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA). Most of the ACA-related cost saving is attributable to a reduction in the annual payment updates for most Medicare services (other than physicians’ services and drugs) by total economy multifactor productivity growth, which is projected to average 1.1 percent per year. The report notes that the long-term viability of this provision is debatable. In addition, an almost 30-percent reduction in Medicare payment rates for physician services is assumed to be implemented in 2012, notwithstanding experience to the contrary.

The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the sixth consecutive year, a "Medicare funding warning" is being triggered, signaling that projected non-dedicated sources of revenues -- primarily general revenues -- will soon account for more than 45 percent of Medicare’s outlays. That threshold was in fact breached for the first time in fiscal 2010. A Presidential proposal is required by law in response to the latest warning..

Conclusion

Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided.

The financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected can adequately prepare.

By the Trustees:

Timothy F. Geithner, Secretary of the Treasury, and Managing Trustee	Hilda L. Solis, Secretary of Labor, and Trustee
Kathleen Sebelius, Secretary of Health and Human Services, and Trustee	Michael J. Astrue, Commissioner of Social Security, and Trustee
Charles P. Blahous III, Trustee	Robert D. Reischauer, Trustee

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A SUMMARY OF THE 2011 ANNUAL SOCIAL SECURITY
AND MEDICARE TRUST FUND REPORTS

Projected long-range costs for both Medicare and Social Security are not sustainable under currently scheduled financing and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided. If action is taken sooner rather than later, more options and time will be available to phase in changes, giving those affected adequate time to prepare. Earlier action will also afford policymakers greater opportunity to minimize adverse impacts on vulnerable populations, including lower-income workers and those who are substantially dependent on program benefits.

What Are the Trust Funds? Congress established trust funds in the U.S. Treasury to account for Social Security and Medicare income and disbursements. Social Security and Medicare taxes, premiums, and other income are credited to the funds. There are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits and the Disability Insurance (DI) Trust Fund pays disability benefits. (The two trust funds are often considered on a combined basis designated OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts: Part B, which pays for physician and outpatient services, and Part D, which covers the prescription drug benefit.

Disbursements from the funds can be made only to pay program benefits and administrative costs. All excess funds must be invested in interest-bearing securities backed by the full faith and credit of the United States.

The Department of the Treasury currently invests all program revenues in special non-marketable securities of the U.S. Government on which a market rate of interest is credited. The trust funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to pay benefits.

What Were the Trust Fund Results in 2010? In December 2010, 43.8 million people received OASI benefits, 10.2 million received DI benefits, and 47.5 million were covered under Medicare. Trust fund operations, in billions of dollars, are shown below (totals may not add due to rounding). The OASI Trust Fund showed a net increase in assets in 2010; DI, HI, and SMI Trust Fund assets declined.

	OASI	DI	HI	SMI
Assets (end of 2009)	$2,336.8	$203.5	$304.2	$76.6
Income during 2010	677.1	104.0	215.6	270.4
Outgo during 2010	584.9	127.7	247.9	274.9
Net increase in assets	92.2	-23.6	-32.3	-4.5
Assets (end of 2010)	2,429.0	179.9	271.9	72.1

What Were the Sources of Income to the Trust Funds in 2010? The following table shows income, by source, to each trust fund in 2010 (totals may not add due to rounding)

Source (in billions)	OASI	DI	HI	SMI
Payroll taxes	$544.8	$92.5	$182.0	—
General revenues	—	—	0.1	$204.6
General Fund reimbursements	2.0	0.4	—	—
Interest earnings	108.2	9.3	13.8	3.1
Beneficiary premiums	—	—	3.3	58.4
Taxes on benefits	22.1	1.9	13.8	—
Transfers from States	—	—	—	4.0
Other	a	—	2.7	.2
Total	677.1	104.0	215.6	270.4

^a Less than $50 million. (Chart from SSA Trustee Report Summary)

Link to SUMMARY OF THE 2011 ANNUAL REPORTS

*Please see post below for 2011 Medicare Report