Senior Support Programs Still Bleeding Red Ink

Entitlements finances continue deteriorating as political gridlock derails inevitable reform decisions.

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In Congress and on the presidential campaign trail, Republicans and Democrats are pounding each other on their sharply differing views of government's role. Senior benefits—Medicare, Medicaid, and Social Security—are the programs most at risk in this partisan debate. And while the talking goes on and on, their financial conditions continue to deteriorate.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

In its annual report on government finances, the Congressional Budget Office (CBO) this week continued its nonpartisan projection of exactly how much red ink the "big three" entitlement programs are producing. Each year, the amounts grow, the trend lines look worse, and the time cushion to fashion orderly adjustments gets smaller.

The outlook in 2012 is no different. The overall deficit will dip because of a stronger economy, but it will still top $1 trillion this year. It's also true that nearly $1 trillion in automatic spending cuts is scheduled to begin in 2013. But those cuts are a year away and can always be amended by Congress in 2013 should the fall elections produce a clear political consensus for change. And even this number is less than meets the eye: The cuts occur over nearly a decade and they largely spare Medicare, which is far and away the nation's worst and least controllable deficit spender.

The CBO has been issuing sobering warnings about this problem for many years. Seniors should take note of its gloomy summary this year:

"The aging of the population and rising costs for health care will push spending for Social Security, Medicare, Medicaid, and other federal health care programs considerably higher as a percentage of GDP [gross domestic product]. If that rising level of spending is coupled with revenues that are held close to the average share of GDP that they have represented for the past 40 years (rather than being allowed to increase, as under current law), the resulting deficits will increase federal debt to unsupportable levels."

[See Senior Finances and the Great Entitlements Debate.]

The most imminent problem is in Social Security's disability program, which is funded by a small portion of the payroll taxes that also support the much larger Social Security income program. Applications for Social Security disability have jumped during the recession. The most logical reason is that people who have either lost their jobs or fear they will lose them have decided to seek income from the disability program. No one is suggesting these applications don't have merit. It's just that there are more of them now, and they are causing the disability trust fund to run out of money even faster than projected.

According to the CBO projections, there was a $162 billion surplus in the disability trust fund in 2011. Annual deficits in the program will be pulling more than $30 a billion a year from that surplus. It will run out of money in 2016, just four years from now.

Surely, you might ask, Congress will step in before then to put the program on a sustainable footing? You might have asked the same question every year for at least the past decade, as the program's impending bankruptcy moved closer and closer to the present.

The larger Social Security trust fund to cover income payments had a surplus of nearly $2.5 trillion in 2011. Including government interest payments on this surplus, the CBO says, it will continue rising until 2021, when it just tops $3 trillion. Then it will begin falling sharply and run down to zero in only 15 or 16 years.

[See What to do About Retiree Healthcare Costs.]

Lastly, Medicare also has a trust fund, which is used to cover payments for hospital and in-patient services (known as Part A of Medicare). It's the same story here: A surplus of $246 billion will be wiped out over the next 10 years.

The major part of Medicare expenses, for doctors, outpatient services, and drugs, has no trust fund. It relies on Medicare insurance premiums and other consumer healthcare payments, but they cover only 25 percent of relevant program costs. The other 75 percent comes from the Treasury's general fund, and amounts to hundreds of billions of dollars a year.

"At $1.6 trillion in 2012, federal outlays for Social Security, Medicare, Medicaid, and other healthcare programs will make up more than 70 percent of mandatory spending (or 10.4 percent of GDP)," the CBO report said. "Spending for those programs will rise by $1.5 trillion from 2012 to 2022—accounting for nearly all of the growth in mandatory spending over that period. By 2022, spending for those programs will represent more than 80 percent of mandatory spending and 12.8 percent of GDP."

You might think there's still tremendous pork and waste in the federal budget, and surely you'll find billions of dollars in unneeded spending if you looked. But billions of dollars, sad to say, doesn't begin to address the deficit issue.

[See Why Consumers Struggle to Understand Healthcare.]

To accommodate mandatory benefit programs, the CBO says in its 10-year forecast, discretionary spending for all other federal programs would have to fall to its lowest level in 50 years. In the year 2022, it would total 5.6 percent of GDP. That's an enormous number. But it is only 40 percent of the projected 14.3 percent of GDP that would be spent on Social Security and federal healthcare programs.

In the healthcare arena, the search for waste does not turn up anything resembling a solution. Spending per Medicare beneficiary is projected to rise at the rate of inflation plus 1 percent a year during the coming decade, the CBO projects. The real problem is that aging baby boomers will swell the number of older Americans using Medicare by 3 percent a year. If that seems like a small number, it's not. There were 48 million Medicare beneficiaries in 2011. There will be 66 million by 2022. Now, multiply those per-person Medicare benefits by that additional 18 million people.

In exit polls after Florida's Republican primary, voters said expanding the economy and increasing the numbers of jobs were major issues for them. There was virtually no discussion of the approaching bankruptcies of the major support programs that older Americans rely on. Politicians are not eager to talk about these programs right now, even in Florida. However, senior voters—in the Sunshine State and elsewhere—deserve to hear a lot more on this topic before they enter voting booths in November.

Twitter: @PhilMoeller