July 25, 2014

Concord Coalition Says Social Security and Medicare Trustees Report Shows the Need For Resumed Budget Negotiations

WASHINGTON -- With today’s Social Security and Medicare Trustees Report showing the growing strain the two programs will have on general revenues in the years ahead, The Concord Coalition strongly urged lawmakers to resume negotiations on a long-term fiscal sustainability plan through the regular order of the budget process.

“Today’s report is a powerful reminder that our nation’s most difficult fiscal problems have not been solved,” said Concord Coalition Executive Director Robert L. Bixby. “Social Security and Medicare are not self-financed. Both programs draw heavily on general revenues to meet their commitments. As the population ages and the number of beneficiaries steadily increases, the strain on general revenues will grow, squeezing out other federal programs and putting upward pressure on taxes.”

“With budget negotiations at an impasse, it is imperative that lawmakers recognize the dangers of inaction,” Bixby said. “Negotiations must resume on a fiscal sustainability plan.”

While attention routinely focuses on the dates at which the Social Security and Medicare Part A (HI) trust funds will become insolvent, the more relevant information for the budget is the amount of general revenues needed to make the benefit payments promised by law.

In today’s report, the trustees project that Social Security will be “solvent” until the year 2033 and Medicare HI until 2026 -- meaning that these trust funds will possess sufficient budget authority (i.e., Treasury bonds) to cover benefits until those dates. However, trust fund solvency says nothing about fiscal sustainability.

The trust funds are a matter of internal bookkeeping. They show how much one arm of the government owes to another. The cash flows, however, demonstrate the programs’ budgetary impact, and by this measure Social Security and Medicare HI are already running deficits. Medicare Parts B and D (SMI) are not in “deficit” because they have an open pipeline to the Treasury for roughly 75 percent of their expenditures. Premiums paid by beneficiaries cover just 25 percent. 

To illustrate the point, the trustees include a table contrasting the trust fund perspective versus the budgetary perspective of the programs’ operations in 2012. According to this table, the combined general revenue subsidy for Medicare and Social Security totaled $403 billion. A portion of this ($112 billion) can be attributed to the Social Security payroll tax cut that has now expired, but an underlying upward trend in general revenue subsidies is indicated by the trustees’ projections.

The budgetary impact of these subsidies cannot be ignored. They underscore the structural imbalance in current fiscal policy and why caps on annual appropriations (discretionary spending) or current revenue levels will not be enough to put the budget on a sustainable path.

As stated by the trustees: “In the past, general fund and interest payments for Medicare and Social Security were relatively small. These amounts have increased substantially over the last 2 decades, however, and the expected rapid future growth of Medicare and Social Security will make their interaction with the federal budget increasingly important.”

“For many years,” Bixby says, “through Republican and Democratic administrations alike, the trustees have warned that legislative actions are needed to put Social Security and Medicare on a sustainable basis. And for just as many years, lawmakers of both parties have ignored these warnings.”

It is true that the trustees’ recent projections have shown a less dramatic outlook for Medicare, in part from changes enacted in the Affordable Care Act (ACA). However, the trustees make the point again in this year’s report that under an alternative projection that assumes, with good reason, that the payment formulas embedded in the ACA become difficult to sustain, Medicare costs could be 40 percent higher over the projection period.

Yet this year’s report also updates it projections in light of the recent slowdown in health care inflation. This slowdown, which most health care economists attribute to both the recession and to more fundamental changes in the health care system, led the trustees to lower their alternative projections for Medicare costs by 0.5 percent of GDP in the year 2040, about 7 percent less than last year. 

“Whether this unambiguously good news about the slowdown in health care inflation continues will depend on the willingness of Congress and the health care system to go along with the changes taking place, to continue with the ACA’s cost controls and spending targets, and to enact further reforms, doubling down on changes with the greatest potential to succeed,” said Concord Coalition Policy Director Joshua Gordon.

Furthermore, even with this overall slowdown in health care costs, the aging of the population helps drive Medicare costs to increase by 67 percent from 2012 to 2040 (from 3.65 percent of GDP to 6.07 percent under the most optimistic of the trustees’ alternative scenarios). 

Earlier this month the Congressional Budget Office projected declining deficits through 2015, leading some people to believe that the nation’s fiscal challenges had largely been met. But this overlooks the longer-term difficulties.

“The trustees report is a good antidote for complacency on the budget,” Bixby said. “Despite some progress in the short term, we still need to deal with the long-term structural problems, including those related to Medicare and Social Security. A change in course will require difficult choices and bipartisan compromise.” 

The Simpson-Bowles and Rivlin-Domenici fiscal reform plans offer model bipartisan approaches, with an array of thoughtful proposals on Social Security and Medicare that deserve careful consideration by elected officials.

It is also encouraging that the budgets proposed by President Obama, House Republicans and Senate Democrats this year all include at least some measures to curb cost growth in Medicare. None of these budgets, however, effectively addresses Social Security reform.  

“We urge Congress to quickly get started on budget negotiations, ideally aiming for a comprehensive fiscal reform plan that would include measures to put Medicare and Social Security on sustainable paths,” Bixby said. “The trustees report shows why entitlement reform is essential to protecting the interests of Americans of all ages.”

Media Contact: Steve Winn (703) 254-7828, swinn@concordcoalition.org

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The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility. Since 1992, Concord has worked to educate the public about the causes and consequences of the federal deficit and debt, and to develop realistic solutions for sustainable budgets. For more fiscal news and analysis, visit concordcoalition.org and follow us on Twitter: @ConcordC