Are Social Security and Medicare on Solid Financial Footing?
By WealthTrust Arizona
It is another election year, and that means that Social Security and Medicare are being debated yet again. Combined, they are our two largest government programs, accounting for 36% of federal expenditures in Fiscal Year 2011. While our two political parties cannot seem to agree on what should be done to secure their future, there does seem to be a consensus that something needs to be done if, as a nation, we want these programs to continue.
The Trustees of the Social Security and Medicare Trust Funds release an annual report detailing the current financial condition and projected outlook for both of these programs. This year’s report, published in late April, determined that both programs are looking at substantial financial challenges which need to be taken seriously and addressed sooner rather than later. Since these programs are funded primarily through the collection of payroll taxes, changing demographics and economic factors have combined to present lawmakers with substantial challenges. As Baby Boomers retire, fewer workers are left to pay into Medicare and Social Security than in the past, resulting in decreasing income from the payroll tax. As beneficiaries live longer, there is more strain placed on the system.
Social Security consists of two parts: the Old-Age and Survivors Insurance (OASI) program and the Disability Insurance (DI) program. Retired people, their families, and survivors of workers receive monthly benefits under OASI, while DI is intended to provide monthly benefits for disabled workers and their families.
The latest Trustee report tells us that, combined, the annual cost for OASI and DI exceed income from the payroll tax. The 2011 deficit was $148 billion, and the projected deficit for this year is $165 billion. These deficits are due at least in part to payroll tax reduction legislation which reduced payroll taxes for employees and self-employed individuals by 2% for 2011 and 2012. This shortfall will be made up by general revenue reimbursements from the Treasury’s General Fund. This means the 2011 deficit is reduced to $45 billion, while this year’s projected deficit is $53 billion. Trustees predict the combined assets of both will run out of money in 2033. The DI Trust Fund is on track to go broke in 2016 (two years earlier than last year’s prediction) while the OASI Trust Fund will become insolvent in 2035, which is three years earlier than last year’s estimate. Over a 75-year projection period, the Trust Funds would require additional revenue equivalent to $8.6 trillion (in present value dollars) to pay all scheduled benefits.
Medicare consists of two trust funds: the Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs) while the Supplementary Medical Insurance (SMI) Trust Fund is made up of two separate accounts – one covering Medicare Part B (which pays for physician and outpatient costs) and one covering Medicare Part D (which covers the prescription drug benefit.)
Medicare does not fare well in this latest Trustee report, which concludes that annual costs have exceeded tax income each year since 2008, a situation which will continue in the years to come. The reports also concluded that future costs projected in this year’s report will most likely be underestimated, because of changes in law which will most likely take place. Projections call for the HI Trust Fund to be depleted in 2024, which was the same date projected last year. The Trustees say this is due to cost savings brought about by the Affordable Care Act (Obamacare), adding that otherwise the Hi Trust Fund would run out of money several years earlier. The Medicare and Social Security Trustees reports also conclude the challenges facing both programs are not going away any time soon, as costs are on track to grow quite a bit over the coming decades. Both reports exhort Congress to address the financial challenges facing our nation in the near future, in the hopes that any solutions will prove less draconian in nature and could be implemented gradually, lessening their impact on retirees and others receiving benefits and the public in general.
If you would like to see a combined summary of the Social Security and Medicare trustees’ reports, please log onto www.socialsecurity.gov. If you have any questions about how your portfolio might be affected by changes in Social Security benefits, please contact your WealthTrust Arizona Financial Advisor.
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