The Social Security and Medicare Trustee’s Annual Not-So-Friendly Reminder

Jun 07, 2018 - 4:15pm

Senior Economist

Every year as the actuarial staff prepare the Trustees Reports for the Social Security and Medicare programs, they must be reminded of the quote by the French philosopher André Gide: “Everything has been said before, but since nobody listens we have to keep going back and beginning all over again.”

The actuarial reports for 2018 demonstrate, once again, that the health of our entitlement programs – such as Social Security, Disability Insurance, and Medicare, among others – are in serious jeopardy.

To assess the future financial health of the overall system, the actuaries at the Social Security Administration and the Centers for Medicare and Medicaid Services conduct a financial analysis each year for a 10-year horizon, a 75-year horizon, and an indefinite horizon under three different sets of economic and actuarial assumptions. Figures for the “intermediate” set of assumptions are most often cited.

Under the intermediate assumptions the actuaries estimate that for 2018 Social Security’s total cost (including interest) will be greater than its income for the first time since 1982. Benefits will erode the total assets of the trust fund, with complete exhaustion of the combined trust fund in 2034, the same estimate as last year, but now one year closer. 

Insolvency does not imply either program will be completely broke as we commonly hear, but they will not be able to make full payments as promised. For example, in the case of Social Security, beneficiaries would receive roughly three-quarters of promised benefits, a percentage that would decline over time. The solvency of Disability Insurance was prolonged because money was set aside from Social Security payroll taxes.

Understanding the financial welfare of the Medicare program is a bit more complicated because the program is fragmented, financed through multiple revenue sources, and runs through two separate trust funds, the Hospital Insurance (HI) Trust Fund (as Medicare Part A) and the Supplementary Medical Insurance (SMI) Trust Fund (Medicare Part B and Part D).

The trustees project the HI Trust Fund fails the short-term test of solvency and will be depleted in 2026, three years earlier than projected in last year’s report, despite higher estimates of economic growth. The trustees project the SMI trust fund will remain adequately financed into the indefinite future because current law provides financing from general revenues and beneficiary premiums each year to meet the next year’s expected costs, thereby contributing directly to our deficit and debt.

Ongoing solvency doesn’t means SMI is out of the woods, however. Rising health care costs and demographics cause SMI projected costs to grow more than 70%, from 2.1% of GDP in 2017 to 3.6% of GDP in 2037. General revenues will finance roughly three-quarters of SMI costs, and premiums paid by beneficiaries almost all of the remaining quarter. These general revenue transfers are the main drivers of future and rapidly rising overall federal budget deficits.

The trustees have repeatedly cautioned policymakers to act sooner than later and have analyzed many options to reduce or eliminate the long-term financing shortfalls in our nation’s entitlement programs.

The U.S. Chamber commends the admonition from the trustees: “Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”

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About the Author

About the Author

Brian Higginbotham
Senior Economist

Brian Higginbotham is a senior economist at the U.S. Chamber of Commerce.