Social Security and Medicare are still treading down a dangerous financial path.
The trustees for both entitlement programs issued their annual reports on Friday, showing—without much surprise—that a year of political gridlock did little to change the long-term challenges confronting Social Security and Medicare, which represent 38 percent of all federal spending.
The Social Security trust funds will be insolvent in 2033, the same deadline projected last year. Its disability trust fund will be exhausted by 2016, requiring reform soon, including the possibility that Social Security payroll taxes be allocated differently.
Insolvency does not mean that the supplemental income program is going broke, just that incoming tax revenue will only be able to cover slightly more than three-quarters of the government’s obligations after 2033.
Medicare’s “Hospital Insurance” trust fund faces insolvency in 2026 and will only be able to pay out 87 percent of its current obligations. Because of smaller growth in health care expenses, the date is slightly better than last year’s report when insolvency was projected for 2024.
Robert Greenstein, president of the progressive Center on Budget and Policy Priorities, summarized the insolvency problem with two succinct observations.
“It’s always possible to keep muddling along, but one can’t do that forever,” he told reporters Friday.
The timeline toward insolvency is long enough that President Obama and House Republicans do not necessarily need to craft a deal to shore up the finances of Medicare and Security. But politicians will increase the likelihood of painful reforms—such as tax hikes or benefit cuts—the longer that they delay any repairs.
“The longer one waits, the less attractive your policy choices become,” Greenstein said.
With that in mind, here are three big lessons from the trustee reports:
This Changes None of the Politics – Neither the White House nor House Republicans focused much on the Social Security and Medicare figures.
President Obama spoke about stopping interest rates on new federally subsidized student loans from doubling on July 1. He called on extending the current 3.4 percent rate while noting the improving stock market and declining budget deficit.
House Speaker John Boehner (R-OH) and Majority Leader Eric Cantor (R-VA) also emphasized their plan to tie the rates to the 10-year Treasury yield. Neither of them tweeted about the trustee report, even though the key Republican talking point for the past two years has been the programs’ troubled financial trajectories.
The Republican National Committee quickly declared, “Another year of kicking the Social Security ‘can down the road.’” It quoted Obama as pledging in a 2009 interview with The Washington Post editorial board to improve the sustainability of federal entitlements.
Of course, Obama does have plans to help improve the finances of Social Security and Medicare. But the GOP tends to favor overhauls that shrink the government footprint more. Obama proposed tying their spending growth to a less generous inflation metric known as chained-CPI, a policy that Republicans liked, but said was inadequate. However, the president has expanded the lifespan of Medicare already, just not in a way that Republicans like.
Obamacare Helped – GOP lawmakers can criticize the 2010 attempt to increase health insurance coverage. It introduces new taxes, contains unwieldy regulations, and appears to be an implementation nightmare.
But Obamacare —which could prove its detractors wrong—has already succeeded in one way with Medicare. The Hospital Insurance Fund was supposed to be insolvent in 2017, nine years earlier than the current projection.
These Are Based on (Big) Assumptions – As a rule of thumb, the longer the timeline, the more likely that government projections are wrong. The trustee reports have been relatively consistent in recent years, but there are two critical assumptions contained in them.
First of all, current law mandates a 25 percent reduction in Medicare physician payments starting next year. But Congress always passes a “doc fix” to prevent the spending cut, so an appendix to the trustee report notes that Medicare expenses could be higher than noted in the report.
Secondly, payroll taxes help fund both Medicare and Social Security, so higher incomes matter for generating revenue to cover the expenses of both programs. The trustees project that average real wages—adjusted for inflation—will be 55 percent higher than today at $68,000. Dean Baker at the Center for Economic Policy and Research noted in a Friday post, “In the last three decades, the vast majority of wage growth has gone to those at the top end of the wage distribution. As a result, workers at most points along the wage distribution have seen little gain in real wages over this period.”
Here’s the point: The report assumes that the United States figures out how to do something it hasn’t accomplished since Obama was in his 20s—raise incomes for those squarely in the middle class.