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Are Social Security and Medicare Going Bust?

Lisa Scherzer
Personal Finance Editor
The Exchange

The Social Security Board of Trustees released its annual report on Monday outlining the fiscal health of the country's two biggest federal programs — Social Security and Medicare. Guess what? Like so many Americans struggling in the tough economy, these programs are facing a budgeting challenge.

Social Security, the report said, is now three years closer to being unable to pay all of its obligations, while Medicare will reach insolvency in 2024.

We spoke with experts from the National Academy of Social Insurance, a nonpartisan policy information organization, about what this means for the two programs and for Americans depending on them: Virginia Reno, Vice President for Income Security Policy, and Lee Goldberg, Vice President for Health Policy.

What's the outlook for each program, and how does it change from last year's forecast?
Medicare: The trustees found no change from last year's forecast on Medicare Part A (the hospital insurance fund); the exhaustion date is still 2024. But that doesn't mean come 2024, the fund is empty. It means the surplus is gone and the program will have to depend on current revenue (taxpayer contributions, in other words) to fund benefits. Their estimate is that in 2024, current revenue will cover 87% of the expenditures in that year, says Goldberg.

The trustees projected that Medicare costs will grow from approximately 3.7% of GDP in 2011 to 5.7% of GDP by 2035, and will increase to about 6.7% of GDP by 2086.

Social Security: The trust funds that support Social Security are expected to be fully funded to pay all scheduled benefits for the next 21 years, until 2033, which is three years earlier than previously projected. Last year's report said it would last until 2036, Reno says. The report also said that, after 2033, the money scheduled to come in from future taxes is enough to cover just three-quarters of benefits. Obviously, "paying only three-quarters of scheduled benefits doesn't sound good to people counting on those benefits," she says. Only Congress could address this by changing the Social Security law.

Why has fiscal health of these programs deteriorated?
What's driving Medicare costs is volume, put simply. Medicare costs, on a per-person basis, are not very high, says Goldberg; they're actually less expensive than commercial health insurance. The costs stem from demographics — there are a lot more people who rely on Medicare. As the baby boom generation ages, the Medicare population is projected to grow to 79 million by 2030, more than double the enrollment in 2000, according  to the Medicare Payment Advisory Commission. Newer and pricier medical technology is also a factor in rising costs, says Goldberg.

When the trustees made the projections about Social Security a year ago, they didn't anticipate there would be as much of a cost of living increase as there was this year. Normally there's one each January. For the previous two years, there was no cost of living adjustment (COLA) increase because inflation was very low. A year ago they estimated this past January's increase be 0.7% (the number is based on the consumer price index). It turned out that by the time the year was out, the price index indicated the COLA would be 3.6%, says Reno, which was largely due to a spike in energy prices in 2011.

The overall economic downturn has also been a factor. The main source of income to the system is taxes on wages. The slow-recovering economy meant earnings didn't rise as much as anticipated. If employment is down, Social Security revenues are down.

Who will this affect?
No one right now. People would only need to start worrying — if Congress does not act — closer to these "exhaustion dates" in 2024 and 2033 for Medicare and Social Security, respectively.

Will Congress act to ensure Medicare and Social Security remain fully solvent and scheduled benefits will be paid out?
Obviously, any shortfall can be address by either raising revenue (taxes) or cutting benefits or some combination of the two. Some action on Social Security is needed over the next five to 10 years to ensure all benefits can be paid in the long term — even for young people who are not yet thinking about their Social Security. There's no precedent in the 70-plus years of Social Security that Congress has failed to act to ensure that scheduled benefits would be paid. "They've got 21 years to figure it out," says Reno. A couple of options that have long been bandied about include lifting the cap on earnings subject to Social Security taxes, which is now $110,100, or gradually raising the tax itself.

An option for Medicare is to increase the payroll tax, but it's probably not a good year to consider that given the fragility of the economy, says Goldberg.

Additional facts about Social Security and Medicare:

Social Security
Who gets benefits: 55.6 people receive Social Security each month, in one of three categories: retirement insurance; disability insurance; survivor insurance.
How it's financed: Employers and employees both pay a 6.2% tax on the first $110,000 of a worker's wages. Congress temporarily reduced the worker portion of the tax to 4.2% for 2011 and 2012.
Average monthly benefit (2012): $1,219 for retirees; $1,092 for disabled workers.
Surplus: In 2011, the Social Security trust funds collected $805.1 billion and paid out $736.1 billion, leaving a surplus of $69.0 billion for the year. The Social Security trust funds had a total balance of $2.677.9 trillion at the end of 2011.

Who's covered: About 48.7 million beneficiaries, 40.4 million of those are 65 and older.
How it's financed: Employers and employees each pay a 1.45% tax on all wages (payroll tax). Medicare beneficiaries pay monthly premiums for outpatient and prescription coverage.
Average spending: About $12,000 a year per beneficiary.
Deficit: In 2011 the trust fund received income of $228.9 billion and paid out $256.7 billion in benefits and expenses, leaving a deficit of $27.7 billion for the year.