SOCIAL
SECURITY TRUSTEES
ISSUE 2005 ANNUAL REPORT
There are six trustees of the Social Security and Medicare Trust Funds:
the Secretary of the Treasury, the Secretary of Labor, the Secretary
of Health and Human Services, the Commissioner of Social Security and
two members appointed by the President. The trust funds were created
in the U.S. Treasury to account for all program income and disbursements.
Social Security and Medicare taxes, premiums and other income are credited
to the funds. Benefit payments and program administrative costs are
the only purposes for which disbursements from the funds can be made.
There are four separate trust funds. For Social Security, the Old-Age
and Survivors Insurance (OASI) Trust Fund pays retirement and survivors
benefits and the Disability Insurance (DI) Trust Fund pays disability
benefits. (The combined trust funds are described as OASDI.) For Medicare,
the Hospital Insurance (HI) Trust Fund pays for inpatient hospital
and related care. The Supplementary Medical Insurance (SMI) Trust Fund
is composed of Part B, physician and outpatient services, and Part
D, prescription drug benefits beginning in 2006. In December 2004,
39.7 million people were receiving OASDI benefits, 7.9 million were
receiving DI benefits and 41.7 million were covered by Medicare. Each
year the trustees report on the current status and projected condition
of the funds over the next 75 years. The following is a summary of
the 2005 Annual Reports.
The fundamentals of the financial status of Social Security and Medicare
remain problematic under the intermediate economic and demographic
assumptions. Social Security’s current annual cash surpluses
will soon begin to decline and will be followed by deficits that
begin to grow rapidly toward the end of the next decade, as the baby
boom generation retires. The HI Trust Fund that pays hospital benefits
had negative cash flows in 2004 and annual cash flow deficits are
expected to continue and grow rapidly after 2010, as baby boomers
begin to retire. The growing deficits in both programs will lead
to exhaustion in trust fund reserves for HI in 2020 and for Social
Security in 2041. In addition, the SMI Trust Fund that pays for physicians
services and the new prescription drug benefit will require substantial
increases over time in both general revenue financing and premium
charges. As reserves in Social Security and HI are drawn down and
SMI general revenue financing requirements continue to grow, pressure
on the federal budget will intensify. The Trustees do not believe
that currently projected long run growth rates of Social Security
and Medicare are sustainable under current financing arrangements.
The annual cost of Social Security benefits represents 4.3% of gross
domestic product (GDP) today and is projected to rise to 6.4% in 2079.
The projected 75-year actuarial deficit in the combined OASI and DI
Trust Funds is 1.92% of taxable payroll, up slightly from 1.89% last
year. The program continues to fail the long-range test of close actuarial
balance, by a wide margin. Projected OASDI tax income will begin to
fall short of outlays in 2017 and will be sufficient to finance only
74% of scheduled annual benefits by 2041, when the combined OASDI Trust
Fund is projected to be exhausted.
Social Security could be brought into actuarial balance over the next
75 years in various ways, including an immediate increase of 15% in
the amount of payroll taxes or an immediate reduction in benefits of
13% (or some combination of the two). To the extent that changes are
delayed or phased in gradually, greater adjustments in scheduled benefits
and revenues would be required. Ensuring that the system is solvent
on a sustainable basis over the next 75 years and beyond would also
require larger changes.
As reported last year, Medicare’s financial difficulties came
sooner -- and more severely -- than those confronting Social Security.
While both programs face essentially the same demographic challenge,
underlying health care costs per enrollee are projected to rise faster
than the wages per worker on which the payroll taxes paid and on which
Social Security benefits are based. As a result, while Medicare’s
annual costs are currently 2.6% of GDP, or about 60% of Social Security’s,
they are now projected to surpass Social Security expenditures in 2024
and reach almost 14% of GDP in 2079.
The projected 75-year actuarial deficit in the HI Trust Fund is now
3.09% of taxable payroll, down slightly from the 3.12% in last year’s
report, due primarily to slightly greater income in 2004 and slightly
lower costs than estimated last year. The fund again fails the test
of short-range financial adequacy, as assets drop below the level of
the next year’s projected expenditures within 10 years -- in
2014. The fund also continues to fail the long-range test of close
actuarial balance, by a wide margin. Though the projected date of HI
Trust Fund exhaustion moved back slightly to 2020 (from 2019), projected
HI tax income falls short of outlays in this and all future years.
HI could be brought into actuarial balance over the next 75 years by
an immediate 107% increase in program income or an immediate 48% reduction
in program outlays (or some combination of the two). However, as with
Social Security, adjustments of far greater magnitude would be necessary
to the extent changes are delayed or phased in gradually, or to make
the program solvent on a sustainable basis over the next 75 years and
beyond.
Part B of the SMI Trust Fund, which pays doctors’ bills and
other outpatient expenses, and the new Part D, which pays for access
to prescription drug coverage, are both projected to remain financed
into the indefinite future, because current law automatically sets
financing each year to meet the next year’s expected costs. Nevertheless,
expected rapid cost increases will result in a rapidly growing amount
of general revenue financing -- projected to rise from just under 1%
of GDP today to 6.2% in 2079, as well as substantial increases over
time in beneficiary premium charges.
The conclusion is that, though highly challenging, the financial difficulties
facing Social Security and Medicare are not insurmountable. But action
must be taken to address them in a timely manner. The sooner these
difficulties are addressed the more varied and less disruptive can
be their solutions. With informed public discussion and creative thinking
that relates the principles underlying these programs to the economic
and demographic realities, as well as to the changing needs and preferences
of working and retired households, Social Security and Medicare can continue to play a critical role in the lives of all Americans.
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