FACING FACTS ALERT 33

The Truth about Entitlements and The Budget
(Volume III, Number 6 -- April 28, 1997)

The 1997 annual reports of the Social Security and Medicare Trustees, released late last week, are similar to the 1996 reports. The main thing that's changed is that we are now a year closer to the Baby Boom's retirement and fiscal collapse.

• The Trustees still project that Social Security benefits will exceed earmarked tax revenues starting in 2012 and that the system's trust funds will go bankrupt in 2029. It is the earlier date that is fiscally relevant. Since Social Security's trust-fund "assets" consist of nothing but Treasury IOUs, they can only be redeemed if Congress cuts other spending, hikes taxes, or borrows from the public to raise the cash. By the time it goes bankrupt in 2029, Social Security will already be running an annual operating deficit of $615 billion and tax revenues will cover just 75 percent of benefits, slightly less than the 77 percent projected last year.

• The Trustees still project that Medicare's Hospital Insurance (HI) trust fund is headed for bankruptcy in 2001. HHS Secretary Donna Shalala tries to put a positive spin on this news by noting there's still $120 billion in the fund-- enough to cover "all claims in the near future." Unfortunately, this is only true on paper. What matters fiscally is HI's operating balance. In 1997, this balance will be a deficit of $26 billion; over the next few years, the HI shortfall will grow rapidly --adding $56 billion annually to the federal deficit by 2001.

• The Trustees still project that HI's sister program, Supplementary Medical Insurance (SMI), will grow twice as fast as the economy. "Bankruptcy" is not an issue with SMI -- but only because its general revenue subsidy automatically rises to plug any gap between program expenditures and beneficiary premiums. From 1997 through 2001, the taxpayer subsidy to SMI will grow from $58 billion to $89 billion annually.

• The Trustees still project that when the age wave rolls in the total cost of Social Security and Medicare will double as a share of workers' taxable payroll-- from 17 percent today to 35 percent by 2040. The official projection, moreover, may be optimistic. According to an alternative "high-cost" Trustees scenario whose assumptions about future trends in productivity and longevity more closely reflect recent historical experience, the combined cost of Social Security and both parts of Medicare will explode to 55 percent of payroll.

• The Trustees still project that Social Security's actuarial deficit is 2.2 percent of taxable payroll. In theory, this is the amount that taxes would have to be raised, starting today, to keep Social Security's trust funds "solvent" for a full seventy-five years. Other things being equal, the actuarial deficit in this year's report would have risen to 2.3 percent of payroll as another long-term deficit year loomed within the Trustees' time horizon. But the Trustees also increased their real interest rate assumption, which inflated the value of Social Security's mythical trust fund. Social Security's actuarial deficit will almost certainly rise to 2.3 percent of payroll next year-- and it will keep rising by nearly 0.1 percentage points every year thereafter.

FACING FACTS AUTHORS: Neil Howe and Richard Jackson
CONCORD COALITION EXECUTIVE DIRECTOR: Martha Phillips

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Last updated: 28 Apr 1997