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Social Security and Medicare

Social Security and Medicare

Scott Maxwell - Thursday, June 06, 2013

Each year the Trustees of the Social Security and Medicare Trust funds release reports to Congress on the financial health of these systems. This year’s report, issued on May 31st, showed that both programs are facing financial challenges but hidden within it were a few positive developments as well.

A review of the reports ( Summary of the 2013 Annual Reports, Social Security and Medicare Boards of Trustees) shows that these two programs accounted for 38% of Federal expenditures in fiscal year 2012. As you know these programs are funded through the collection of payroll taxes. Two factors, demographics and the economic situation, have resulted in less dollars being paid into the system. In addition those same demographics mean that more people are collecting benefits from the systems than in the past.

The not-so-good part of the report concerns Social Security. There are two parts to this system, Old Age and Survivors Insurance (OASI) and Disability Insurance (DI).  Looking at the combined systems (OASDI) the reports tells us that costs already exceed the payroll tax and that the combined assets will be depleted in 2033. The DI portion is in the worst shape with funds only projected to last until 2016 while the OASI portion will last until 2033 (both projections are the same as last year). Once these funds are depleted revenues will be able to pay 77% of the benefits under current benefit formulas. The long term (75 year) actuarial deficit is 9.6 trillion (1 trillion more than last year’s estimate). A trillion here a trillion there…

The news regarding Medicare is a bit better but not much. Medicare has two parts as well, the Hospital Insurance Trust Fund (HI) that pays for Medicare Part A and the Supplementary Medical Insurance Trust Fund (SMI) that pays for both Medicare Part B (physician care) and Medicare Part D (prescription drug coverage). The HI portion is projected to be depleted in 2026 (2 years later than last year’s projection) with revenues expected to fund 87% of benefits thereafter. Over the long term (75 years) the actuarial deficit decreased slightly from 1.35% of payroll to 1.11%. So there is movement in the right direction in regards to this at least.

We thought one of the charts included in the report particularly interesting. This shows both Social Security and Medicare as a percentage of GDP historically and estimated out through time. We have a big increase through about 2035 and then a leveling thereafter. The numbers on the ‘program cost’ side could certainly vary with any changes made to the programs or unexpected demographic differences (such as increased immigration of younger workers). But the GDP assumptions could change dramatically as well, both positively and negatively.

                      The reports make it clear that the problems with these benefit programs aren’t going away anytime soon. Changes will need to be made in order to preserve them for the future. Of course the notion that a 75 year trip into the future via actuarial projections gives a real sense of just what the future holds doesn’t provide certainty either. Things could be worse than projected or things  could actually be better. Nonetheless we have to work with what we have, and the changes we make will ultimately be based on our best guess now.

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