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Cypen & Cypen
APRIL 4, 2005

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001


There are six trustees of the Social Security and Medicare Trust Funds: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, the Commissioner of Social Security and two members appointed by the President. The trust funds were created in the U.S. Treasury to account for all program income and disbursements. Social Security and Medicare taxes, premiums and other income are credited to the funds. Benefit payments and program administrative costs are the only purposes for which disbursements from the funds can be made.

There are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits and the Disability Insurance (DI) Trust Fund pays disability benefits. (The combined trust funds are described as OASDI.) For Medicare, the Hospital Insurance (HI) Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund is composed of Part B, physician and outpatient services, and Part D, prescription drug benefits beginning in 2006. In December 2004, 39.7 million people were receiving OASDI benefits, 7.9 million were receiving DI benefits and 41.7 million were covered by Medicare. Each year the trustees report on the current status and projected condition of the funds over the next 75 years. The following is a summary of the 2005 Annual Reports.

The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security’s current annual cash surpluses will soon begin to decline and will be followed by deficits that begin to grow rapidly toward the end of the next decade, as the baby boom generation retires. The HI Trust Fund that pays hospital benefits had negative cash flows in 2004 and annual cash flow deficits are expected to continue and grow rapidly after 2010, as baby boomers begin to retire. The growing deficits in both programs will lead to exhaustion in trust fund reserves for HI in 2020 and for Social Security in 2041. In addition, the SMI Trust Fund that pays for physicians services and the new prescription drug benefit will require substantial increases over time in both general revenue financing and premium charges. As reserves in Social Security and HI are drawn down and SMI general revenue financing requirements continue to grow, pressure on the federal budget will intensify. The Trustees do not believe that currently projected long run growth rates of Social Security and Medicare are sustainable under current financing arrangements.

The annual cost of Social Security benefits represents 4.3% of gross domestic product (GDP) today and is projected to rise to 6.4% in 2079. The projected 75-year actuarial deficit in the combined OASI and DI Trust Funds is 1.92% of taxable payroll, up slightly from 1.89% last year. The program continues to fail the long-range test of close actuarial balance, by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017 and will be sufficient to finance only 74% of scheduled annual benefits by 2041, when the combined OASDI Trust Fund is projected to be exhausted.

Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 15% in the amount of payroll taxes or an immediate reduction in benefits of 13% (or some combination of the two). To the extent that changes are delayed or phased in gradually, greater adjustments in scheduled benefits and revenues would be required. Ensuring that the system is solvent on a sustainable basis over the next 75 years and beyond would also require larger changes.

As reported last year, Medicare’s financial difficulties came sooner -- and more severely -- than those confronting Social Security. While both programs face essentially the same demographic challenge, underlying health care costs per enrollee are projected to rise faster than the wages per worker on which the payroll taxes paid and on which Social Security benefits are based. As a result, while Medicare’s annual costs are currently 2.6% of GDP, or about 60% of Social Security’s, they are now projected to surpass Social Security expenditures in 2024 and reach almost 14% of GDP in 2079.

The projected 75-year actuarial deficit in the HI Trust Fund is now 3.09% of taxable payroll, down slightly from the 3.12% in last year’s report, due primarily to slightly greater income in 2004 and slightly lower costs than estimated last year. The fund again fails the test of short-range financial adequacy, as assets drop below the level of the next year’s projected expenditures within 10 years -- in 2014. The fund also continues to fail the long-range test of close actuarial balance, by a wide margin. Though the projected date of HI Trust Fund exhaustion moved back slightly to 2020 (from 2019), projected HI tax income falls short of outlays in this and all future years. HI could be brought into actuarial balance over the next 75 years by an immediate 107% increase in program income or an immediate 48% reduction in program outlays (or some combination of the two). However, as with Social Security, adjustments of far greater magnitude would be necessary to the extent changes are delayed or phased in gradually, or to make the program solvent on a sustainable basis over the next 75 years and beyond.

Part B of the SMI Trust Fund, which pays doctors’ bills and other outpatient expenses, and the new Part D, which pays for access to prescription drug coverage, are both projected to remain financed into the indefinite future, because current law automatically sets financing each year to meet the next year’s expected costs. Nevertheless, expected rapid cost increases will result in a rapidly growing amount of general revenue financing -- projected to rise from just under 1% of GDP today to 6.2% in 2079, as well as substantial increases over time in beneficiary premium charges.

The conclusion is that, though highly challenging, the financial difficulties facing Social Security and Medicare are not insurmountable. But action must be taken to address them in a timely manner. The sooner these difficulties are addressed the more varied and less disruptive can be their solutions. With informed public discussion and creative thinking that relates the principles underlying these programs to the economic and demographic realities, as well as to the changing needs and preferences of working and retired households, Social Security and Medicare can continue to play a critical role in the lives of all Americans.

Copyright, 1996-2006, all rights reserved.

Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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