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Bush's economic downturn strikes again...while ACA helps matters some.
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A SUMMARY OF THE 2010 ANNUAL REPORTS
Social Security and Medicare Boards of Trustees
A MESSAGE TO THE PUBLIC:
Each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. This message summarizes our 2010 Annual Reports.
The outlook for Medicare has improved substantially because of program changes made in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the "Affordable Care Act" or ACA). Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year, and the 75-year HI financial shortfall has been reduced to 0.66 percent of taxable payroll from 3.88 percent in last year’s report. Nearly all of this improvement in HI finances is due to the ACA. The ACA is also expected to substantially reduce costs for the Medicare Supplementary Medical Insurance (SMI) program; projected program costs as a share of GDP over the next 75 years are down 23 percent relative to the costs projected for the 2009 report.
Much of the projected improvement in Medicare finances is due to a provision of the ACA that reduces payment updates for most Medicare goods and services other than physicians’ services and drugs by measured total economy multifactor productivity growth, which is projected to increase at a 1.1 percent annual rate on average. This provision is premised on the assumption that productivity growth in the health care sector can match that in the economy overall, rather than lag behind as has been the case in the past. This report notes that achieving this objective for long periods of time may prove difficult, and will probably require that payment and health care delivery systems be made more efficient than they are currently. To facilitate this outcome, the ACA establishes a broad program of research on innovative new delivery and payment models to improve the quality and cost-effectiveness of health care for Medicare — and, by extension, for the nation as a whole. The improvement in Medicare’s finances projected in this report highlights the importance of making every effort to make sure that ACA is successfully implemented. If health care efficiency cannot be substantially improved through productivity gains or other measures, then over time the statutory Medicare payment rates would become inadequate. In that situation, the payment update reductions might be suspended, in which case actual long-range costs would be larger than those projected under current law.
While the financial outlook for Medicare in this year’s report is substantially improved relative to last year, further reforms will be needed. It is expected that the HI Trust Fund balance will fall below one year’s projected expenditure beginning in 2012, which means the test for short-range financial adequacy is not met. And it is projected that SMI will continue to put increasing pressure on the federal budget and beneficiaries in the years ahead, though to a much lesser extent than was projected last year prior to the ACA. Over the next 75 years, SMI costs are expected to average 3.3 percent of GDP, which is 1.4 percentage points higher than the SMI cost share of GDP in 2009.
The financial outlook for Social Security is little changed from last year. The short term outlook is worsened by a deeper recession than was projected last year, but the overall 75-year outlook is nevertheless somewhat improved primarily because a provision of the ACA is expected to cause a higher share of labor compensation to be paid in the form of wages that are subject to the Social Security payroll tax than would occur in the absence of the legislation. The Disability Insurance (DI) Trust Fund, however, is now projected to become exhausted in 2018, two years earlier than in last year’s report. Thus, changes to improve the financial status of the DI program are needed soon.
Social Security expenditures are expected to exceed tax receipts this year for the first time since 1983. The projected deficit of $41 billion this year (excluding interest income) is attributable to the recession and to an expected $25 billion downward adjustment to 2010 income that corrects for excess payroll tax revenue credited to the trust funds in earlier years. This deficit is expected to shrink substantially for 2011 and to return to small surpluses for years 2012-2014 due to the improving economy. After 2014 deficits are expected to grow rapidly as the baby boom generation’s retirement causes the number of beneficiaries to grow substantially more rapidly than the number of covered workers. The annual deficits will be made up by redeeming trust fund assets in amounts less than interest earnings through 2024, and then by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084. The projected exhaustion date for the combined OASI and DI Trust Funds is unchanged from last year’s report.
The long-run financial challenges facing Social Security and those that remain for Medicare should be addressed soon. If action is taken sooner rather than later, more options will be available and more time will be available to phase in changes so that those affected have adequate time to prepare.
Medicare
The projected 75-year actuarial deficit in the Hospital Insurance (HI) Trust Fund is 0.66 percent of taxable payroll, down substantially from 3.88 percent projected in last year’s report. The HI fund still fails the test of short-range financial adequacy, as projected annual assets drop below projected annual expenditures within 10 years — by 2012. The fund also continues to fail the long range test of close actuarial balance. The projected date of HI Trust Fund exhaustion is 2029, 12 years later than in last year’s report, at which time dedicated revenues would be sufficient to pay 85 percent of HI costs. The share of HI expenditures that can be financed with HI dedicated revenues is projected to decline slowly to 76 percent in 2045 and then to rise slowly, reaching 89 percent in 2084. Over 75 years, HI’s estimated actuarial imbalance is 23 percent as large as payroll taxes, and 16 percent as large as program outlays.
Part B of Supplementary Medical Insurance (SMI), which pays for doctors’ bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. However, the aging population will result in SMI costs growing rapidly from 1.9 percent of GDP in 2009 to 3.5 percent of GDP in 2040; about three-quarters of these costs will be financed from general revenues and about one-quarter from premiums paid by beneficiaries. Relatively small amounts of SMI financing are received from special payments by States and from fees on manufacturers and importers of brand-name prescription drugs.
As occurred in 2010, it is expected that about one quarter of Part B enrollees will be subject to unusually large premium increases next year. This occurs because premium rates are set so that total premiums finance a specific share of Part B costs, and it is projected that the other three-quarters of Part B enrollees will not be subject to a premium increase in 2011 due to an expected zero Social Security benefit COLA in December 2010. A "hold-harmless" provision of current law limits those individuals’ premium increases to the increase in their Social Security benefits.
Social Security
The annual cost of Social Security benefits represented 4.8 percent of GDP in 2009 and is projected to increase gradually to 6.1 percent of GDP in 2035 and then decline to about 5.9 percent of GDP by 2050 and remain at about that level. The projected 75-year actuarial deficit for the combined Old-Age and Survivors Insurance and Disability Insurance (OASI and DI) Trust Funds is 1.92 percent of taxable payroll, down from 2.00 percent projected in last year’s report.
The 0.08 percentage point reduction in the actuarial deficit reflects a 0.06 percentage point increase due to the change in the valuation date to 2010 and the inclusion of an additional year, 2084, in the projections, a 0.14 percentage point reduction due the ACA’s effect on the share of labor compensation that is subject to OASDI taxes, and other changes that net to zero. Although the combined OASDI program passes the short-range test of financial adequacy, the DI program does not; DI costs have exceeded tax revenue since 2005, and trust fund exhaustion is projected for 2018, two years earlier than was projected last year. In addition, OASDI continues to fail the long-range test of close actuarial balance. Projected OASDI tax income will be sufficient to finance about 75 percent of scheduled annual benefits in 2037 through 2084 after the combined OASI and DI Trust Funds are projected to be exhausted. Over 75 years, Social Security’s actuarial imbalance is 15 percent as large as payroll taxes, and 12 percent as large as program outlays.
Conclusion
The ACA makes significant progress toward making Medicare financially viable. But while it is projected that the Medicare HI Trust Fund is adequately financed until 2029, and the Social Security OASI and DI Trust Funds are adequately financed until 2040 and 2018, respectively, the significant longer term financial imbalances of the programs still need to be addressed. The sooner action is taken to address the long-run financial imbalances, the more reform options will be available, and the more time there will be to phase in changes so that those affected will have adequate time to prepare. |
