Social Security, Medicare Outlooks Worsen

Annual trustee reports attribute changes to economy, aging baby boomers, and longevity gains.

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Pressure to reform Social Security and Medicare intensified Monday with the release of key reports showing that the financial condition of both programs, particularly Social Security, continue to worsen.

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The nation's primary retirement program has moved three years closer to being unable to pay all of its obligations, according to its 2012 annual trustees report. The program, financed by payroll taxes, will be unable to meet all its claims beginning in 2033, compared with 2036 as projected in last year's report. More ominously, the program's projected deficits reached their greatest level since major Social Security reforms were enacted nearly 30 years ago, and the year-to-year increase in the deficit was the program's second largest in any year since those reforms.

In contrast, the Medicare trustees report said its hospital insurance trust fund would run out of money in 2024, the same year as forecast in last year's report. However, that fund covers only the program's hospital charges (known as part A of Medicare). Payments for physician and outpatient services, drug coverage, and Medicare Advantage insurance funding shortfalls come from public funds. And the long-term costs of those programs continue to rise.

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In a press briefing, Social Security trustee Robert Reischauer said several factors contributed to the program's weakened outlook, including a larger-than-expected increase in the program's annual cost of living adjustment, lower-than-expected employee earnings and thus payroll taxes, and long-term deterioration in the outlook for employee hours and wages. There were also a number of technical adjustment factors, he added, and all of them had a negative impact on program projections this year, which he said was unusual. The COLA was 3.6 percent this year, but was forecast by trustees to be only half that in 2013.

The net result is that "we don't have a great deal of time left to resolve" the program's challenges in an acceptable way, Reischauer said. He and other trustees renewed calls for Congress to enact reforms to restore the financial soundness of both Social Security and Medicare.

Without changes to Social Security, it would only be able to pay 75 percent of program benefits after 2033. Proposals to improve the program's financial health have focused principally on raising the annual income subject to payroll taxes (it's now $110,100 a year), increasing the retirement age at which beneficiaries can claim full benefits (it's now 66 and already scheduled to rise to 67), and reducing the level of the annual COLA..

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Social Security uses payroll taxes to raise money for separate trust funds for retirement and disability benefits. The disability fund is in much worse shape than the larger retirement fund and is forecast to fall short of being able to pay 100 percent of its claims in 2016. Congress could move funds from the healthier retirement fund into the disability fund. That was done in 1994, Treasury Secretary Tim Geithner told the press briefing. But he said the Obama Administration would like to avoid such a fix and instead address the disability funding shortfall as part of a larger, long-term reform of the entire program.

"This year's Trustees Report contains troubling, but not unexpected, projections about Social Security's finances," agency commissioner Michael Astrue said in a prepared release. "It once again emphasizes that Congress needs to act to ensure the long-term solvency of this important program, and needs to act within four years to avoid automatic cuts to people receiving disability benefits."

"Medicare and Social Security provide the basic foundation of retirement security for millions of Americans today, and will be just as important—if not more so—to future retirees," commented AARP Executive Vice President Nancy LeaMond. "After more than a year of listening to Washington talk about these programs as line items in a budget, people want politicians to understand how any changes to Social Security and Medicare will impact them and their families."

Corrected on 4/23/2012: A previous version of this article incorrectly listed the maximum annual income subject to Social Security payroll taxes. The actual earnings ceiling for 2012 is $110,100.