December 22, 2014

Trustees' New Projections Show Why Entitlement Reform Can't Wait

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Anyone wondering why Social Security and Medicare should be “on the table” in budget negotiations need look no further than the 2011 Trustees’ Report issued on May 13.

As is usually the case, media accounts of the trustees’ report tended to focus on trust fund balances rather than on the cash balances and growing costs of the two programs. Viewed from a trust fund perspective, the financial condition of Social Security and Medicare may appear troubling but of no immediate concern. Social Security’s combined trust funds are projected to remain solvent until 2036 and the Medicare HI trust fund [Part A] is solvent until 2024. The Medicare SMI trust funds [Parts B and D] are permanently solvent, but only because they have an automatic draw on general revenues.

So why worry about these programs now? Why not wait another 10 years before making changes in Medicare and 20 years or more for Social Security?

One reason is that both programs are straining the federal budget now because they are paying out more than they are taking in from dedicated resources, including payroll taxes, taxation of benefits, and premiums paid by beneficiaries. The balance is made up through general revenues from the Treasury. Moreover, this situation is projected to worsen in the coming years.

As summed up by the trustees: “The drawdown of Social Security and Medicare [Part A] trust fund reserves and the general revenue transfers into [Medicare Part B] will result in mounting pressure on the Federal budget. In fact, pressure is already evident.”

The extent of this budgetary pressure can be seen by looking at the general revenue requirements of both programs over the coming 10 years. According to the trustees, Social Security and Medicare required a general revenue infusion of $290 billion in 2010. Most of that, $206 billion, came from the open pipeline to the Treasury for roughly 75 percent of Medicare Part B costs. By design, beneficiaries’ premiums pay just 25 percent of the program’s costs.

However, because Social Security and Medicare Part A are running cash deficits, they too are “drawing down” their trust funds -- which are best thought of as claims on general revenues. The trust funds provide permission to issue checks. According to the trustees, Social Security cashed in $46 billion of its trust fund bonds in 2010 and Medicare Part A cashed in $38 billion.

The general revenue needs of both programs will expand rapidly as aging baby boomers become eligible for benefits in much greater numbers and as health care costs continue to outpace economic growth. In 2020 alone, Social Security and Medicare will draw roughly $560 billion from general revenues. The projected total drain from the two programs over the coming decade is $3.8 trillion. Absent reforms, this problem will just continue to get larger in future decades.

2011 Trustees' Report Revenue Transfers

Not only will the problem grow larger in the future, but these totals are almost certainly understated. As the trustees are quick to point out, some of the cost savings assumed in the report are highly uncertain.

The trustees are required to assume that a 29 percent cut in doctor payments will be implemented in 2012, even though Congress continually acts to prevent such cuts. The report also assumes that the cost controls enacted in the Affordable Care Act will take effect exactly as written in law, although there is considerable uncertainty as to whether the productivity targets it established are sustainable over the long term.

For these reasons, the trustees state, “the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report.”

Medicare’s chief actuary is more blunt, saying in his Statement of Actuarial Opinion that “the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range….or the long range.”

These programs already represent almost 33 percent of total federal spending, with millions of Americans depending on their stability and soundness. It makes little sense to exclude programs this large from any broad discussion of the federal budget and its direction for the future. The prospect of large and growing cash deficits in the entitlement programs only adds to the need for them to be part of the conversation.

The new public trustees of the programs, former CBO Director Robert Reischauer and former Deputy Director of the National Economic Council Charles Blahous provide an important warning in their message in the trustees’ report:

“One way or the other the imbalance between scheduled benefits and future revenues must be resolved. Further delay in enacting corrective legislation to do so as equitably as possible would simply mean that continued uncertainty will surround how the imbalances will be resolved and that the unavoidable adjustments will be compressed into a shorter time period, be concentrated upon fewer affected individuals, and be more disruptive as a result.”