The Corner

Trustees’ Report Reminds Us: Doing Nothing Isn’t An Option

A few weeks ago the Congressional Budget Office released a report showing that our short term fiscal situation had improved. While this is a welcomed development, our short-term outlook was never the most worrisome aspect of our financial situation — that would be our long-term outlook. In that regard, the annual reports of the Social Security and Medicare trustees were both released in the last week. As always, the reports present a grim picture of the two programs’ financial outlooks. As my colleague Chuck Blahous, who is currently serving as one of the two public trustees for the Social Security and Medicare Programs, explained earlier this week, “we are looking at over $30 trillion in total obligations that we have to find sources to pay for above and beyond projected payroll tax and premium revenues.” Basically, both of these programs continue to be on unsustainable paths.

Here are a few highlights:

1) Since 2010, Social Security has been running a permanent cash-flow deficit. That means that 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 balances (first using the interest, then the principal) to keep payments to retirees going. In concrete terms, Treasury will borrow money to pay back the trust funds.

2) The top lines for the program aren’t deteriorating, and remain at the same levels as last year: The Social Security retirement trust fund will be exhausted by 2035, while the first part of Social Security to hit the wall is the disability fund, in 2016.

But the picture isn’t improving either. This is bad news, because the dwindling trust fund determines the spending authority of the program. Without a positive balance in the trust fund, the program won’t have the authority to pay out full benefits, but only what the program collects in taxes — which today means a 23 percent cut in benefits across the board.

3) The Medicare Hospital Insurance (HI) trust fund will run out of assets in 2026 — that’s two years later than projected last year. However, there again we should jump for joy — it’s not clear that these projections will materialize, because right now there is less than one year’s worth of benefit payments in the Trust Fund. The HI trust fund, like the SS one, determines the spending authority of the programs. 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 by itself (Medicare HI 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 may play a key role in when the trust fund finally dries up. 

4) As was the case in the past, even these grim numbers may be too optimistic, because some of the expected revenue or cost savings in the current law may never materialize. In fact, a section at the end of the Trustees’s Report (p. 273), 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 would require a physician fee reduction of an estimated 24.7 percent on January 1, 2014 — an implausible expectation.”

Spitalinic points out a number of other factors that explain why we shouldn’t expect cost-reduction aspects of the law to materialize. For instance:

Further, while the Affordable Care Act makes important changes to the Medicare program and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most health care providers cannot improve their productivity to this degree for a prolonged period as a result of the labor-intensive nature of these services.

He concludes:

For these reasons, the financial projections shown in this report for Medicare do not represent reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable).

For alternatives to the spending path of the program, look at this document and the charts it includes. It is very scary.

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. 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 shock will be. As I have said before, 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). However, there are many other options to address our problems — the most unacceptabel one is to do nothing.

Incidentally, for a very good take on the current debate over the implementation of Obamacare and what it may mean for for the average cost of an insurance policy on the individual market, read this excellent piece by Will Wilkinson at The Economist. One of the great sentences in the piece: “Why not be frank about the fact that Obamacare is going to stick it to the young and healthy on the individual market?”

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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