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Tuesday, April 24, 2012 - Page updated at 06:00 a.m.
Social Security heading for insolvency even faster
By STEPHEN OHLEMACHER and RICARDO ALONSO-ZALDIVAR
Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians' reluctance to take painful action to fix the huge retirement and disability program.
The trust funds that support Social Security will run dry in 2033 - three years earlier than previously projected - the government said Monday.
There was no change in the year that Medicare's hospital insurance fund is projected to run out of money. It's still 2024. The program's trustees, however, said the pace of Medicare spending continues to accelerate. Congress enacted a 2 percent cut for Medicare last year, and that is the main reason the trust fund exhaustion date did not advance.
The trustees who oversee both programs say high energy prices are suppressing workers' wages, a trend they see continuing. They also expect people to work fewer hours than previously projected, even after the economy recovers. Both trends would lead to lower payroll tax receipts, which support both programs.
Unless Congress acts - and forcefully - payments to millions of Americans could be cut.
If the Social Security and Medicare funds ever become exhausted, the nation's two biggest benefit programs would collect only enough money in payroll taxes to pay partial benefits. Social Security could cover about 75 percent of benefits, the trustees said in their annual report. Medicare's giant hospital fund could pay 87 percent of costs.
"Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare," the trustees wrote. "If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare."
The trustees project that Social Security benefits will increase next year, though the increase could be small. They project a cost-of-living-adjustment, or COLA, of 1.8 percent for 2013; the actual amount won't be known until October.
Beneficiaries got a 3.6 percent increase this year, the first after two years without one.
More than 56 million retirees, disabled workers, spouses and children receive Social Security. The average retirement benefit is $1,232 a month; the average monthly benefit for disabled workers is $1,111.
About 50 million people are covered by Medicare, the medical insurance program for older Americans.
America's aging population - increased by millions of retiring baby boomers - is straining both Social Security and Medicare. Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans.
Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers' wages. It is paid by both employers and workers. Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program's finances are being made whole through increased government borrowing.
The Medicare tax rate is 1.45 percent on all wages, paid by both employees and workers.
Social Security is split into two funds - one for retirement and survivor benefits and one for disability. The retirement fund is projected to run out of money in 2035 while the disability fund is projected to run dry in 2016. Combined, the two funds will last until 2033.
In the absence of a long-term solution, the trustees who oversee Social Security are urging Congress to shore up the disability system by reallocating money from the retirement program, just as lawmakers did in 1994.
Social Security's trust funds contain a total of $2.7 trillion. The money is invested in U.S. Treasury bonds. The government has used the cash to pay for other programs.
The trust funds have been paying out more in benefits than they have collected in payroll taxes since 2010. The funds, however, will continue to grow until 2021 because they will earn interest on the Treasury bonds, the trustees said.
Many advocates for seniors worry that Washington is too focused on benefit cuts as a way to shore up Social Security. They argue that the program's finances are not as dire as some policymakers contend.
"After 77 years and 13 recessions, Social Security continues to prove itself time and again as the most effective public program in our nation's history, keeping its promise to our seniors, disabled workers, widows and children," said Rep. Xavier Becerra, the top Democrat on the House Social Security Subcommittee.
Medicare is trickier to address because it has to contend with health care inflation, not just an aging population. Options include raising the eligibility age, cutting payments to service providers, shifting more costs to beneficiaries or even privatizing the program.
On Monday, Treasury Secretary Timothy Geithner called Social Security and Medicare the "twin pillars of retirement security in this country," and he declared, "It is critical that reforms are slowly phased in over time so current beneficiaries are not affected and future beneficiaries do not experience precipitous changes."
President Barack Obama's health care law is supposed to trim Medicare expenses by $500 billion, extending the life of the program. But some independent experts doubt the full savings will materialize, and even the administration concedes more cuts are needed. If Republicans succeed in repealing the law, they will have to come up with similar cuts of their own.
"The Affordable Care Act began this process with the most significant entitlement reform in decades," Geithner said, referring to the new health law.
Alternative cost projections prepared by the trustees' technical experts suggest the Medicare cuts in the health care law would be unsustainable, driving payment rates so low that 15 percent of hospitals, nursing homes and home health providers would be in the red by 2019.
The trustees conceded that their own Medicare projections could be too rosy. Based on current law, they assume cuts in payments to doctors that Congress routinely waives will actually take place. They also assume the health care law will squeeze the full amount of its cuts from the program.
"Medicare's actual future costs are highly uncertain and are likely to exceed those shown ...in this report," the trustees said.
Republicans, including presidential candidate Mitt Romney, are proposing to overhaul Medicare by converting it into a system that mainly relies on private health insurance plans to cover future retirees. Beneficiaries would get a fixed payment from the government, with low-income seniors in poor health receiving more.
Obama says he wants to preserve the existing program and its federally guaranteed benefits. But in negotiations with congressional Republicans last year, he went further than most Democrats by signaling he was willing to raise the eligibility age by two years to 67. He's also willing to limit future increases in Medicare spending, a policy that prompts serious misgivings from groups such as AARP.
"Today's report reminds us that Medicare must be reformed and strengthened or it will soon collapse," said Lanhee Chen, Romney's policy director.
The trustees who oversee the programs are Geithner, Social Security Commissioner Michael J. Astrue, Labor Secretary Hilda Solis and Health and Human Services Secretary Kathleen Sebelius. There are also two public trustees, Charles Blahous and Robert Reischauer.
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