On May 1, 2006, the Medicare and Social Security trustees released their annual reports. The Medicare trustees’ report assesses the financial health of the Hospital Insurance (Part A) and Supplemental Medical Insurance (Part B) Trust Funds and the Medicare program as a whole. While there is no immediate crisis facing the Medicare program, the program’s financial health has worsened in the last year — which should demand meaningful changes, starting with reconsideration of the special-interest giveaways enacted in 2003.
The Social Security trustees’ report provides an overview on the state of Social Security and projections for the program’s finances for the next 75 years. This year’s report shows that the country’s premier social insurance program is safe for decades to come.
Medicare’s Financial Health Has Worsened
The Trustees project that the Part A Trust Fund will be depleted in 2018 — which represents a three-year drop in the projected years of solvency compared to last year’s estimate, and a 16-year drop since the 2002 estimate. In contrast, the Trust Fund gained 19 years of solvency during the Clinton administration. The bad decisions and poor economic management of the White House and Congress — which have accelerated Medicare spending growth through overpayments to private health plans while reducing revenue into the Trust Fund through poor economic policy — have put Medicare in poorer financial health.
“Funding Warning” May Trigger Harmful Cuts
The Trustees estimate that approximately 45 percent of Medicare spending will be supported by general revenues in 2012. This calculation led the trustees to issue a warning of “excess general revenue Medicare funding” in the current report. This warning marks the first step towards either deep cuts in Medicare reimbursement or significant increases in beneficiary cost-sharing, which would impose hardship on people with Medicare coverage but would fail to provide long-term answers to Medicare’s financial challenges. If next year’s projections include the same mandatory warning, the president will be required to submit legislative proposals to reduce the proportion of general revenues supporting Medicare to less than 45 percent of program costs. Because these actions must correct the “problem” of general revenue support for Medicare, proposals that include progressive income taxes or other broad-based revenue sources would not be considered. Instead, only options that would weaken the program or hurt beneficiaries — such as increased cost-sharing and premium payments, reductions in the Medicare benefit package or provider payment cuts — would be on the table.
Medicare Beneficiaries Bear the Burden of Poor Fiscal Management
The Trustees project that Medicare Part B premiums — which cover approximately 25 percent of Part B costs — will increase to $98.20 per month in 2007, a $9.70 per month increase from 2006 levels. If this projection is accurate, Part B premiums will have almost doubled under the Bush administration’s watch to date. In comparison, Part B premiums rose only 36.6 percent from 1993 to 2001. Through emphasis on the wrong priorities — favors for special interests and misplaced faith in competition — conservatives have accelerated Part B premium growth and stretched older Americans’ and disabled individuals’ monthly budgets to the breaking point.
Any Changes Should Improve Medicare’s Financial Health
Instead of undermining the Medicare program through ill-advised changes — or even, if the president’s recent budget proposal were to be enacted, implementing automatic, arbitrary, across the board cuts in provider payments — Congress and the White House should work together to eliminate the special interest giveaways enshrined in the Medicare Modernization Act of 2003. For example, the systematic overpayment to Medicare plans, compared to expected enrollee costs, accelerates the Trust Fund’s insolvency and drives up Medicare premiums for beneficiaries.
Social Security is much more than a retirement program: A little less than half of Social Security’s beneficiaries actually receive their own retirement check. To be exact, 50.2 percent of Social Security beneficiaries received some form of insurance benefit — spousal benefits, survivorship benefits, and disability insurance benefits — in 2004, the last year for which data are available.
Social Security’s benefits are secure for decades: The outlook for Social Security presented in today’s report has changed little from last year’s. Social Security will be able to pay full benefits through 2040 without any changes to the program. This is one year less than was projected last year. The decline was primarily a result of changes in the economic assumptions, particularly a decline in the assumed long-term interest rate.
Through 2017, Social Security is expected to take in more contributions than it pays in benefits. At that point, Social Security will sell its bonds to the Treasury to pay for part of that year’s benefits. If the trust funds were not real, the assets in them could not be redeemed, i.e., the Treasury would not pay. Simultaneously, the Treasury will honor its promised interest and loan payments to foreign investors, which have financed more than 80 percent of federal government deficits since 2001. There is no doubt that the Treasury will honor its obligations to foreign investors and Social Security’s beneficiaries in the future. Hence, full, promised benefits are secure until the trust fund exhaustion date.
Not everybody is paying their fair share for Social Security’s future: Today’s trustees’ report shows that only 83.8 percent of wages and salaries were subject to Social Security taxation, down from 90 percent in 1983. Importantly, while the share of wages and salaries that fall beyond Social Security’s cap — currently $94,200 — and are thus no longer subject to payroll taxation has grown, the share of taxpayers with incomes above the limit has declined. In 1983, 6.4 percent of taxpayers had earnings above the Social Security cap. In 2003 — the last year for which data are available — only 5.5 percent of taxpayers had earnings above the cap. In essence, growing wage inequality resulted in a shrinking tax base for Social Security. Today’s trustees’ report confirms this by saying that the decline in the share of taxable earnings out of covered earnings “was mainly due to a relative increase in wages for high wage earners.”
Karen Davenport is the Director of Health Policy at the Center for American Progress and Christian E. Weller is a Senior Economist at the Center for American Progress.