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The Social Security and Medicare Boards of Trustees met this morning to complete their annual financial review of the programs and to transmit their Reports to Congress. I’d like to welcome my fellow Trustees and particularly our two new Public Trustees, Charles Blahous and Robert Reischauer. Public Trustees are essential to the process of completing these reports, and I am pleased that these two gentlemen are now involved. I also want to acknowledge the chief actuaries, Stephen Goss and Richard Foster, and their staffs. Thank you all for your hard work.
Today’s reports make clear that while both Social Security and Medicare have sufficient resources to meet their obligations for at least the next decade, it is important that we put in place reforms to strengthen these programs. Fundamentally, Social Security and Medicare benefits are secure today, but reform will be needed so that they will be there for current and future retirees.
The Social Security program has dedicated resources that will cover benefits for the next 25 years. But in 2036, one year earlier than was projected in last year’s report, the Social Security Trust Fund will exhaust its assets and incoming revenues will be insufficient to maintain payment of full benefits. Medicare’s Hospital Insurance Trust Fund will exhaust its assets in 2024, five years earlier than was projected in last year’s report, due to technical changes in the economic assumptions underlying the projections. The Medicare report illustrates the importance of the Affordable Care Act, which has significantly strengthened Medicare’s finances and extended the life of the Medicare Trust Fund.
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, but will grow rapidly thereafter as the retirement of the baby boom generation swells the beneficiary population. It is projected that tax and interest income will be sufficient to pay benefits through 2022, after which the Trust Fund will be drawn down until depleted in 2036, one year earlier than was projected last year. After 2036, it is expected that tax income will be sufficient to finance about three quarters of scheduled benefits through 2085. Social Security’s estimated 75-year actuarial deficit is 2.22 percent of taxable payroll, up 0.3 percentage points from last year’s estimate. The slight worsening in Social Security’s projected finances is primarily due to lower assumed death rates at advanced ages and a slower assumed economic recovery.
Relative to Social Security’s combined Trust Funds, Medicare’s Hospital Insurance (HI) Trust Fund faces a more immediate funding shortfall, though its longer term financial outlook is better. HI has run cash deficits since 2008 and under current projections will continue to do so until Trust Fund assets are exhausted in 2024, five years earlier than was projected last year, at which time dedicated revenues would be sufficient to pay 90 percent of HI costs. 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 but still down substantially from 3.88 percent actuarial deficit projected in the 2009 report prior to passage of the Affordable Care Act.
The worsened outlook for of HI's projected finances is primarily due to lower payroll tax revenues caused by a slower assumed economic recovery, and higher HI 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.
We should not wait for the Trust Funds to be exhausted to make the reforms necessary to protect our current and future retirees. Larger, more difficult adjustments will be necessary if we delay reform. And making reforms soon that are phased in over time would help reduce uncertainty about future retirement benefits.
As the President has said, Social Security and Medicare are more than just government programs. They are commitments that define America as a country where government can make a difference in people’s lives. They are commitments that make our society more fair and more progressive. They are commitments that we have kept for generations. Our imperative to make reforms is an imperative to maintain these commitments and to ensure that the next generation of Americans can count on retirement security.
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