July 23, 2015

Big Trouble for Entitlements

  • A new report shows the Social Security Disability Insurance trust fund will be out of money by the end of next year.

  • The Social Security retirement trust fund is in long-run financial trouble.

  • Medicare continues on an unsustainable path, with total projected unfunded obligations approaching $30 trillion over the next 75 years.

On Wednesday, the Social Security and Medicare trustees released their annual reports on the state of the country’s two largest entitlement programs – accounting for 42 percent of federal spending last year. The news is sobering. Both programs will experience spending growth well in excess of GDP growth over the next two decades, largely due to the retirement of baby boomers. Within two decades, the trustees project that Social Security expenses will equal about 6.0 percent of GDP and Medicare expenses will equal about 5.4 percent of GDP.

Social Security Funding Shortfall

Disability Insurance Trust Fund Will Be Insolvent Next Year

The Disability Insurance trust fund is on the brink of insolvency. As in last year’s report, the trustees project that the trust fund will be depleted late next year. DI outlays have exceeded incoming DI tax revenue every year since 2003. Last year, expenditures exceeded revenue by more than $30 billion, as the reserves in the DI trust fund fell to $60 billion at the end of 2014.

DI suffers from a staggering number of problems. Economists with the Federal Reserve found that the growth in disability is a large factor in the rapid decline in the labor force participation rate during the Obama administration. Fewer than one percent of program beneficiaries return to the workforce in any given year. The Social Security Administration has grossly mismanaged the program, allowing hundreds of administrative law judges to rubber-stamp claimants into DI. One top-ranking administrative law judge told 60 Minutes in 2013 that “if the American public knew what was going on in our [disability] system, half would be outraged and the other half would apply for benefits.”

The DI trust fund has significantly worsened on President Obama’s watch, and he has failed to present any substantive ideas for reform. If the trust fund reaches bankruptcy, beneficiaries will face an across-the-board 19 percent cut in benefits.

Social Security Retirement Benefits at Risk

The Social Security Old-Age and Survivors Insurance trust fund provided payments last year to 48 million people totaling $714 billion. The OASI trust fund is also facing depletion, but 20 years from now, in 2035. When the OASI trust fund is depleted, there will be no more Treasury bonds in the trust fund to help pay for benefits, and the program will have to rely on tax revenue as it is received. At that point, the trustees project that the OASI trust fund would have enough tax revenue to cover 77 percent of promised benefits. Combining the DI and OASI trust funds would not solve the problem, as it would just allow the DI program to continue with the same policies that have allowed it to spend nearly all of its trust fund. Nevertheless, the trustees often report on the theoretical combined OASDI program as a way to illustrate the financial troubles facing the two programs. The combined trust funds have spent more than they have received in tax revenue since 2010. Together, they would become insolvent in 2034, at which point all benefits for both the disabled and the elderly would immediately be cut by 21 percent.

Rather than proposing long overdue reforms, the president has offered to kick the can down the road by offering a stand-alone payroll tax reallocation. Currently, the total payroll tax equals 12.4 percent of wage income – with 1.8 percent dedicated to DI and 10.6 percent dedicated to the old age and survivor component. The president’s proposal would increase the tax earmarked for the DI trust fund to 2.7 percent, while reducing the payroll tax earmarked for the OASI trust fund to 9.7 percent for the next five years. The president’s proposed reallocation would transfer about $350 billion from the OASI trust fund to the DI trust fund in the next five years.

The president’s stand-alone reallocation proposal will undoubtedly delay reforms and structural changes once again. His plan defies repeated calls from the Social Security trustees – who include his secretaries at Treasury, Labor, and Health and Human Services, and the acting Social Security commissioner – for prompt action to address Social Security’s unsustainable path.

There are long-standing reasons why the trust funds should be separate. Social Security public trustee Chuck Blahous wrote in April that “[w]hen Social Security was first established, lawmakers assured the public that its retirement pensions would be self-financing. … When disability insurance was added later, similar promises were made that it would also be self-sustaining, and not siphon funds from Social Security’s retirement program or from the general budget.” Blahous noted that President Eisenhower’s signing statement cited the separate trust fund as one of the features that led him to sign the bill: “A separate trust fund was established for the disability program in an effort to minimize the effects of the special problems in this field on the other parts of the program – retirement and survivors’ protection.”

The issue of combining the DI and OASI trust funds was the subject of a House rule at the beginning of this Congress. The House created a point of order against any bill that did not increase the “actuarial balance” of the combined trust funds, meaning that a bill to simply lump the two trust funds together without reforms would be subject to this point of order.

Medicare Benefits Also at Risk

Yesterday, the trustees also released their annual report on the Medicare program. Their projection is that Medicare’s total unfunded obligations over the next 75 years equal $27.9 trillion under current law and $36.8 trillion under an illustrative alternative scenario.

The trustees project that Medicare’s Part A trust fund – which covers inpatient hospital expenditures – will become insolvent in 2030. This is the same year they predicted in last year’s report. At that point, incoming revenue is projected to cover about 86 percent of program expenditures. This percentage declines over time. Part B, which finances doctor bills and most other outpatient expenses, and Part D, which finances prescription drugs, can borrow as much as needed from general revenue, so they do not face imminent bankruptcy.

According to the trustees, Medicare’s 53.8 million beneficiaries cost taxpayers $613 billion in 2014. Per-beneficiary Medicare expenditures rose by 2.3 percent in 2014. This was the largest increase in three years but lower than historical Medicare spending growth. Based on the slowdown in Medicare spending growth, the trustees assume “a substantial long-term reduction in per capita health expenditure growth rates relative to historical experience.”

Despite predicting a slowdown in health care spending, the trustees say that under current law Medicare’s costs will rise from the current 3.5 percent of GDP to 5.6 percent of GDP in 2040 and to 6.0 percent of GDP in 2089.

The trustees’ projections for Medicare contain greater uncertainty than those for Social Security because they are significantly influenced by the trajectory of health care spending, which is influenced by unpredictable new health care interventions and treatments.

The trustees anticipate that Medicare’s payment rates to doctors will be lower than what they would have been under the Sustainable Growth Rate formula by 2048 and will continue to decline thereafter. According to the report, “[a]bsent a change in the delivery system of level of update by subsequent legislation, the Trustees expect access to Medicare-participating physicians to become a significant issue in the long term under current law.”

Obamacare made large cuts to Medicare, particularly Medicare Advantage, which on paper extended the solvency of the Part A trust fund. Rather than shoring up program financing, the savings from the Medicare cuts were largely used to finance Obamacare’s subsidies and Medicaid expansion.

The trustees also present an alternative scenario, which assumes that these provider cuts and many of Obamacare’s cuts to Medicare do not occur. Using the alternative scenario, the trustees project that Medicare’s costs rise to 6.0 percent of GDP in 2040 and to 9.1 percent of GDP in 2089.

Action Needed Soon

Once again, the trustees have called on lawmakers to act to reform these programs. That call is well made, unfortunately that same message has fallen on deaf ears in the White House.

“Social Security’s Disability Insurance (DI) Trust Fund now faces an urgent threat of reserve depletion, requiring prompt corrective action by lawmakers … Beyond DI, Social Security as a whole as well as Medicare cannot sustain projected long-run program costs … Lawmakers should take action sooner rather than later to address these structural shortfalls.”

      – Social Security and Medicare Boards of Trustees, July 22, 2015

The president has generally shown that he is not interested in shoring up the nation’s largest entitlement programs or protecting the millions of people who rely on them. The result is a disability insurance program that will likely go broke before the president leaves office, a Social Security program that will not pay full benefits to Americans currently 47 years old or younger, and a Medicare program that increasingly relies on general revenue funding, crowding out other public priorities and potentially leading to large tax increases or benefit cuts.

Issue Tag: Health Care