The Medicare and Social Security Trustees Report Is Out: Things Aren’t Looking Up

by Veronique de Rugy

The Medicare and Social Security Trustees Report came out this week, and the main story is mostly that the reported improvements to Medicare aren’t likely to materialize and Medicare and Social Security are still insolvent — in other words, without reforms, these programs simply will cease to work the way they’re supposed to in the relatively near future. A few highlights:

1) Since 2010, Social Security has been running a constant cash-flow deficit – taxes collected for the program aren’t enough to cover the benefits paid to retirees. To fill the gap, the program is drawing from the trust fund (first using the interest paid on the bonds in the fund, then their principal) to keep payments to retirees going. In concrete terms, Treasury is borrowing money to pay back the trust funds.

2) The top lines for the programs remain at basically the same levels as last year: The Social Security retirement trust fund will be exhausted by 2034, one year sooner than projected last year, while the first part of Social Security to hit the wall is the disability fund, in 2016. Nothing has changed when you look at the trust funds combined, with their expiration date set to 2033. 

My colleague Jason Fichtner summed up what this means nicely yesterday:

The projected dates of insolvency for Social Security’s trust funds remain largely unchanged. I fear this news will give lawmakers and the public a false sense that the program doesn’t require immediate reform.

But make no mistake, there is a Social Security crisis. Misunderstanding the critical state of the program’s financial health would lead to grave consequences for beneficiaries of both the disability and retirement programs. We need to act now to reform Social Security. Delaying will only make necessary reforms more severe for those that can least afford it.

3) The Medicare Hospital Insurance (HI) trust fund will run out of assets in 2030 — that’s four years later than projected last year. But don’t jump for joy — projections are still pretty dire. And without a positive balance in the HI trust fund, the program won’t have the authority to pay out all benefits — again, just what the program collects in payroll taxes (the Medicare trust fund also gets some income from premiums and from payments by states). The decline in the growth rate of national health-care spending that started in 2003 is helping to push off when the trust fund drives up, but it can only do so much.

4) As was the case in the past, even these grim numbers are too optimistic, because some of the expected revenue or cost savings in the current law may never materialize. In fact, a section in an appendix of the 2014 Trustees’s Report (p. 276), called “Statement of Actuarial Opinion,” makes that point very clearly. Paul Spitalinic, the acting chief actuary of the program, explains for instance that current law assumes that Congress will not pass a “doc fix” and will cut payments for physicians by 21 percent come 2015, and calls it “an implausible expectation.”

Reading off the Statement of Actuarial Opinion, Chris Conover at AEI explains why the baseline that gave us the four improvements shouldn’t be taken seriously:

But that baseline portends cuts in hospital payment rates so drastic that Obamacare-mandated reductions in payments to hospitals so drastic that:

  • Hospital payments for both Medicare and Medicaid will be 38% lower than the amounts paid by private health insurers by the year 2030 (Figure 1).
  • Eventually, payment reductions to hospitals will mean they are paid 59 percent less by Medicare and Medicaid than by private health insurers!

Indeed, the cuts in Medicare payments that were included in Obamacare are so draconian, the Medicare actuaries have estimated that:

“by 2019 up to 5 percent more hospitals would experience negative total facility margins relative to 2012.18 Additionally, 5-10 percent of hospitals would experience negative Medicare margins by 2019. By 2040, approximately half of hospitals, two-thirds of skilled nursing facilities, and 90 percent of home health agencies would have negative total facility margins.”

In short, the rosy picture for Medicare will come true if and only if we’re willing to tolerate devastating reductions in access to care for seniors and others who rely on facilities dependent on Medicare revenues (read: virtually all U.S. hospitals). As the Medicare actuaries have pointed out, Congress has succeeded in bypassing statutorily required cuts in Medicare payments to doctors for 15 straight years (the latest “doc fix” keeping this charade going through March 31, 2015). It would be completely out-of-character behavior for Congress not to similarly respond to the pleas (likely shrieks) from hospitals and other Part A providers to find some way to delay or avoid the mandatory Obamacare cuts. The alternative fiscal scenario simply assumes they succeed.

As Conover explains, once these unrealistic assumptions are lifted, the solvency of the program looks much worse. ”Under the alternative fiscal scenario Medicare Part A will grow 2-1/2 times as fast as the baseline scenario that undergirds all of [liberals'] conclusions about Medicare’s fiscal health,” he writes.

His whole post is a must-read for those of you who are interested. 

The bottom line is that the long-term financial outlook for Social Security and Medicare is bad and something needs to be done about it. Like Fichtner, I am worried our improved short-term fiscal outlook may give us a false sense of safety, allowing us to delay reforming these programs. That would be wrong — the longer Congress delays dealing with them, the worse the eventual shock will be. I will stick to what I said last year when the Trustees report was released: I would prefer moving away from a system where everyone gets something from the government (after being forced to pay for part of it — part being the relevant word here) and shift to a true safety net where we take care of poor people (that could mean a better Medicaid and no Medicare). But, of course, there are many options for how to deal with this problem — we’re going to need to pick one, though.