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Repeat after me: Social Security and Medicare are not insolvent

By Mark Miller

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[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 challenges.

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 their credibility.

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 tax revenue.

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. (https://reut.rs/2kMIaAU)

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 own.)

(Editing by Matthew Lewis)

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