POLICY AND GOVERNMENT

Recession Hits Social Security Projections


Doomsday for Social Security and Medicare has come a little closer, thanks to the deep recession. The costs of administering Social Security are now expected to exceed tax revenues in 2016, a year earlier than expected, and the trust funds for the program are now projected to run out in 2037, four years earlier than envisioned a year ago. The $468 billion Medicare program is in worse shape, with the Hospital Insurance trust fund now projected to be exhausted in 2017, two years earlier than a year ago.

The new projections were issued in the annual reports of the Social Security and Medicare trustees, issued on May 12. The revised Social Security projections are mainly due to the effects of the economic downturn and changes in longevity assumptions, while the changes in the Medicare outlook are due to lower payroll taxes because of the downturn.

According to the Social Security trustees, under middle-range assumptions, Social Security program costs will increase more rapidly than tax revenues between about 2012 and 2030 because Baby Boom generation retirees will outpace new additions to the labor force. After 2030, "increases in life expectancy and the continued relatively low fertility rates experienced since the Baby Boom will generally cause Social Security system costs to increase relative to tax income, but more slowly."

Growing Gap

The report said that annual costs of the Social Security program will exceed tax income starting in 2016. After that, "the annual gap will be covered with cash from redemp­tions of special obligations of the Treasury that make up the trust fund assets until these assets are exhausted in 2037," the trustees said.

The Medicare trustees said the Hospital Insurance trust fund "does not meet the short-range test of financial adequacy. Although the short-range financial status of the HI trust fund has not been considered satisfactory since 2003, the outlook has further deteriorated as a result of the current economic recession."

A separate Medicare trust fund for physician coverage and prescription drug coverage is in better shape, the trustees said, because the funding provisions are reset each year to match expected costs.

Putting Social Security and Medicare on firmer footing has long been a mantra of Washington politicians, but the mechanics of bringing about changes to the system have proved to be a daunting political challenge. During the campaign, President Obama proposed an increase in payroll taxes on annual income over $250,000 to improve Social Security's financial position. He opposed increasing the age at which Social Security benefits may be collected, another commonly cited fix for the program.

Banking on Reform

The White House is banking on a comprehensive plan to reduce health-care costs to rein in the growth of Medicare costs. Treasury Secretary Timothy Geithner, the head of the trustees group, said the new reports were a reminder that "the longer we wait to address the long-term solvency of Medicare and Social Security, the sooner those challenges will be upon us and the harder the options will be."

"The Medicare Trustees Report makes clear today there is no more important long-term fiscal policy measure than gaining control of the growth of Medicare costs by delivering health-care services more efficiently," Geithner said in a news release. "These savings can only be achieved in the context of a larger effort to control health-care costs and improve quality more generally."

Once Medicare is brought under control, Obama plans to attack Social Security, Geithner said. "This President will work to build a bipartisan consensus to ensure the long-term solvency of Social Security," he said. "The President explicitly rejects the notion that Social Security is an untouchable politically and instead believes there is opportunity for a new consensus on Social Security reform."

GOP Attacks Spending

Republicans seized on the report to attack Obama's spending plans. "The Social Security and Medicare trustees' report confirms what we already knew: Our nation cannot afford to continue this reckless borrowing-and-spending spree," said House GOP leader John Boehner (R-Ohio).

Senator Charles Grassley (R-Iowa), the ranking Republican on the Finance Committee, criticized Obama's plans for expanding health-care coverage. "Instead of getting existing public programs in order right now, some are saying we should create a new government-run health insurance plan. When we can't afford the public health plan we have already, does it make sense to add more?"

At the end of 2008, almost 51 million people were receiving Social Security benefits, including 35 million retired workers and dependents of retired workers, 6 million sur­vivors of deceased workers, and 9 million disabled workers and dependents of disabled workers, the trustees said. Total benefits paid in 2008 were $615 billion. Total income was $805 billion, and assets held in special issue U.S. Treasury securities grew to $2.4 trillion.

In 2008, 45.2 million people were covered by Medicare: 37.8 million age 65 and older, and 7.4 million disabled.

Mintz is news editor for BusinessWeek.com in New York.

Mintz is news editor for BusinessWeek.com in New York.

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