[December 14, 2018]
CHICAGO (Reuters) -
It happens like clockwork each year. The trustees of Social Security
and Medicare issue their annual reports on the programs’ health, and
doomsayers start talking about insolvency and bankruptcy.
This year is no exception. The reports issued on Tuesday yielded
wildly inaccurate news stories - amplified by the social media echo
chamber - suggesting that Medicare and Social Security are headed
for insolvency in the not-too-distant future - meaning that they
would not be able to pay out the money owed for benefits.
It is true that Social Security and Medicare face financial
challenges. But neither is headed for insolvency, bankruptcy or
other dire futures. How do I know this? By taking a careful look at
the trustee reports - and by considering the various parts of both
programs, which have different funding sources and face different
The trustee reports are the most authoritative sources on the
long-term health of both programs. Under federal law, the boards of
trustees of both Medicare and Social Security report to Congress
each year on the status and long-term financial prospects of each
program. The reports are prepared by the professional actuaries who
have made careers out of managing the numbers and are signed by
three Cabinet secretaries, and the program commissioners.
Social Security and Medicare also are supposed to have two publicly
appointed trustees – one Republican, one Democrat - who sign off on
the reports. But these spots have been vacant for nearly three
years, robbing the reports of key independent oversight and nicking
This year, the Social Security trustees report that the combined
trust funds for retirement and disability will be depleted in 2034,
unchanged from last year’s forecast. That is a problem that needs to
be addressed, because if nothing is done, Social Security would be
able to pay out only 77 percent of promised benefits from current
In other words, retirees - and future retirees - would lose nearly a
quarter of their benefits. But that is not insolvency, and solutions
are readily available to avoid that unacceptable outcome.
Conservatives favor benefit cuts via higher retirement ages, more
means-testing and a less generous annual cost-of-living adjustment.
Progressives advocate gradually increasing payroll taxes and lifting
the cap on taxable benefits. Considering that middle-class
households depend mainly on Social Security for support in
retirement, it would be wiser to follow the progressive agenda.
SELF-INFLICTED POLICY WOUNDS
Medicare is not spinning out of control, either. The trustees report
that one component - the Hospital Insurance trust fund (Part A of
Medicare) - will be depleted in 2026, three years earlier than
predicted last year. Part A is the only component of Medicare that
is prepaid - it is funded mainly through the 2.9 percent payroll tax
split by workers and employers.
The dates of projected depletion tend to bounce around, and trustees
note that even if exhaustion occurred in 2026, Medicare would still
be able to pay 91 percent of promised benefits. The problem could be
addressed by increasing tax rates or by reducing program costs; the
trustees estimate that cutting costs by 17 percent could put the
fund back in balance.
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But expense growth has not been the key issue lately
in the hospital trust fund - spending growth has been stable.
“Predominantly, the issue is revenue,” Paul Spitalnic, Medicare’s
chief actuary, said on Wednesday at a forum on the report at the
American Enterprise Institute (AEI), a conservative think tank.
Instead, Medicare’s trustees blame the more sobering projections on
several factors, most related to revenue. Payroll tax revenue is
falling due to greater-than-expected weakness in wage growth.
Other causes are self-inflicted policy wounds, rather than
shortcomings of Medicare itself. For example, the recently enacted
tax law is reducing income taxes on Social Security benefits, some
of which go to the HI trust fund. Repeal of the Affordable Care
Act’s individual mandate is increasing the number of uninsured
Americans, and driving up Medicare payments for uncompensated care.
Congress also has repealed the ACA-created Independent Payment
Advisory Board, a review group empowered to put the brakes on
excessive cost growth in Medicare.
Moreover, focusing only on Part A misses the bigger story on
Medicare. Part B (outpatient services) and Part D (prescription
drugs) are funded through a combination of general revenue and
premiums paid by beneficiaries. Rising spending in the program does
increase pressure on government spending and retiree pocketbooks,
but the contributions are adjusted annually, so their ability to pay
benefits is never in question.
Conservative policy experts acknowledge that terms like "insolvency"
are tossed around carelessly.
“The media has an unfortunate tendency to focus on the hospital
insurance fund without considering the bigger picture,” said Robert
Moffit, senior fellow in the Heritage Foundation's Center for Health
Policy Studies, speaking at the same AEI forum.
"Saying that Medicare is going bankrupt is not a rational
description of what is happening,” he added. "The hospital fund
hasn’t gone bankrupt in the last half century, and I can’t imagine
it will in the next half century."
Medicare and Social Security both face financial challenges that
need fixing. But carelessly tossing around inaccurate words like
"insolvency" creates needless worry for workers and retirees who
count on these programs. The solutions are readily available
whenever politicians and policymakers decide it is time to act.
(The writer is a Reuters columnist. The opinions expressed are his
(Editing by Matthew Lewis)
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