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Cypen & Cypen

MAY 20, 2011

Stephen H. Cypen, Esq., Editor




A.      On May 13, 2011, the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Fundstransmitted its 2011 Annual Report to the Speaker of the House of Representatives and the President of the Senate. 

The Old-Age, Survivors, and Disability Insurance program in the United States makes available a basic level of monthly income from attainment of retirement eligibility age, death or disability by insured workers.  The OASDI program consists of two separate parts that pay benefits to workers and their families -- Old-Age and Survivors Insurance and Disability Insurance.  Under OASI, monthly benefits are paid to retired workers and their families and to survivors of deceased workers.  Under DI, monthly benefits are paid to disabled workers and their families. 

The Board of Trustees was established under the Social Security Act to oversee financial operations of the OASI and DI Trust Funds.  The Board is composed of six members, four members serve by virtue of their positions in the Federal Government:  the Secretary of the Treasury, theSecretary of Labor, the Secretary of Health and Human Services and the Commissioner of Social Security.  The other two members are public representatives, appointed by the President.  

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the actuarial (financial) status of the OASI and DI Trust Funds.  The 2011 report is the 71st such report. 

At the end of 2010, about 54 million people were receiving benefits: 37 million retired workers and dependents of retired workers, 6 million survivors of deceased workers and 10 million disabled workers and dependents of disabled workers.  During the year, an estimated 157 million people had earnings covered by Social Security and paid payroll taxes.  Total expenditures in 2010 were $713 Billion.  Total income was $781 Billion ($664 Billion of non-interest income and $117 Billion in interest earnings), and assets held in special issue U.S. Treasury securities grew to $2.6 Trillion. 

The assets of the OASI Trust Fund and of the combined OASI and DI Trust Funds are projected to be adequate over the next 10 years under the intermediate assumptions.  However, assets of the DI Trust Fund are projected steadily to decline under the intermediate assumptions, and would fall below 100 percent of annual cost by the beginning of 2013, and continue to decline until the trust fund is exhausted in 2018.  The DI Trust Fund does not satisfy the short-range test of financial adequacy, which requires that the trust fund remain above 100 percent of annual cost throughout the short-range period. 

Combined assets of the OASI and DI Trust Funds are projected to grow throughout the short-range period, from $2,609 Billion at the beginning of 2011, or 353 percent of annual cost, to $3,526 Billion at the beginning of 2020, or 284 percent of annual cost, under the intermediate assumptions.  This increase in assets indicates annual cost is less than total income throughout the short-range period. However, annual cost exceeds non-interest income in 2011 and remains higher throughout the remainder of the short-range period. For last year’s report, combined assets were projected to be 353 percent of annual cost at the beginning of 2011 and 299 percent at the beginning of 2020. 

Under the intermediate assumptions, OASDI cost generally increases more rapidly than non-interest income through 2035 because retirement of the baby-boom generation increases the number of beneficiaries much faster than subsequent lower-birth-rate generations increase the labor force. From 2035 to 2050, the cost rate declines due principally to the aging of already retired baby-boom generation. Thereafter, increases in life expectancy generally cause OASDI cost to increase relative to non-interest income, but more slowly than prior to 2035.  Annual cost is projected to exceed non-interest income in 2011 and remain higher throughout remainder of the long-range period.  However, total income, including interest earnings on trust fund assets, will be sufficient to cover annual cost until 2023.  The dollar level of the combined trust funds is projected to be drawn down beginning in 2023 until assets are exhausted in 2036. Individually, the DI Trust Fund is projected to be exhausted in 2018 and the OASI Trust Fund in 2038. 

The OASDI annual cost rate is projected to increase from 13.35 percent of taxable payroll in 2011 to 17.01 percent in 2035 and to 17.56 percent in 2085, a level that is 4.24 percent taxable payroll more than the projected income rate for 2085.  For last year’s report, OASDI cost for 2085 was estimated at 17.47 percent, or 4.16 percent of payroll more than the annual income rate for that year.  Expressed in relation to the projected gross domestic product, OASDI cost is estimated to rise from the current level of 4.8 percent of GDP to about 6.2 percent in 2035, then to decline to 6.0 percent by 2050, and to remain between 5.9 and 6.0 percent through 2085. 

For the 75-year projection period, the actuarial deficit is 2.22 percent of taxable payroll, 0.30 percentage point larger than in last year's report.  The open group unfunded obligation for OASDI over the 75-year period is $6.5 Trillion in present value, and is $1.1 Trillion more than the measured level of a year ago. If the assumptions, methods, starting values and the law had all remained unchanged, the unfunded obligation would have risen to about $5.8 Trillion due to change in the valuation date. 

Under the long-range intermediate assumptions, annual cost for the OASDI program is projected to exceed non-interest income in 2011 and remain higher throughout remainder of the long-range period. The combined OASI and DI Trust Funds are projected to increase through 2022, and then to decline and become exhausted and unable to pay scheduled benefits in full on a timely basis in 2036.  However, the DI Trust Fund is projected to become exhausted in 2018, so legislative action will be needed as soon as possible.  At a minimum, a reallocation of the payroll tax rate between OASI and DI would be necessary, as was done in 1994. 

For the combined OASDI Trust Funds to remain solvent throughout the 75-year projection period, combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 2.15 percentage points (slightly different than the above-stated 2.22 percent actuarial deficit), scheduled benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 13.8 percent, or some combination of these approaches could be adopted.  Significantly larger changes would be required if current beneficiaries and those close to retirement age were to be held harmless, or if trust fund asset levels were to be stabilized at the end of the 75-year projection period. Projected trust fund shortfalls should be addressed in a timely way so that necessary changes can be phased in gradually, and workers and beneficiaries can be given time to adjust to them. Implementing changes sooner would allow needed revenue increases or benefit reductions to be spread over more generations. Social Security will play a critical role in lives of 56 million beneficiaries and 158 million covered workers and their families in 2011.  With informed discussion, creative thinking and timely legislative action, Social Security can continue to protect future generations. 


B.      On May 13, 2011, the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds transmitted their 2011 Annual Report to the Speaker of the House of Representatives  and the President of the Senate. 


The Medicare program has two components. Hospital Insurance or Medicare Part A, helps pay for hospital, home health, skilled nursing facilityand hospice care for the aged and disabled.  Supplementary Medical Insurance consists of Medicare Part B and Part D.  Part B helps pay for physicians, outpatient hospital, home health and other services for the aged and disabled who have voluntarily enrolled.  Part D provides subsidized access to drug insurance coverage on a voluntary basis for all beneficiaries and premium and cost-sharing subsidies for low-income enrollees.  Medicare also has a Part C, which serves as an alternative to traditional Part A and Part B coverage.  Under this option, beneficiaries can choose to enroll in and receive care from private “Medicare Advantage” and certain other health insurance plans that contract with Medicare.  The costs for such beneficiaries are generally paid on a prospective, capitated basis from HI and SMI Part B trust fund accounts. 

The Medicare Board of Trustees was established under the Social Security Act to oversee the financial operations of the HI and SMI trust funds.  The Board comprises six members.  Four members serve by virtue of their positions in the Federal Government:  the Secretary of the Treasury, who is the Managing Trustee; the Secretary of Labor; the Secretary of Health and Human Services; and the Commissioner of Social Security. The other two members are public representatives, appointed by the President. 

The Social Security Act requires that the Board, among other duties, report annually to the Congress on the financial and actuarial status of the HI and SMI trust funds.  The 2011 report is the 46th to be submitted. 

As was the case with the 2010 Trustees Report, this report reflects the effects of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010.  This legislation, referred to collectively as the “Affordable Care Act” or ACA, contained roughly 165 provisions affecting the Medicare program by reducing costs, increasing revenues, improving certain benefits, combating fraud and abuse, and initiating a major program of research and development for alternative provider payment mechanisms, health care delivery systems, and other changes intended to improve the quality of health care and reduce its costs to Medicare. 

Although the long-term viability of some of these provisions is debatable, the annual report to Congress on the Financial status of Medicare must be based on current law. In this report, the various cost-reduction measures -- most importantly the reductions in the payment rate updates for most categories of Medicare providers by the growth in economy-wide multifactor productivity -- are assumed to occur in all future years, as required by the Affordable Care Act.  In addition, an almost 30 percent reduction in Medicare payment rates for physician services is assumed to be implemented in 2012 as required under current law, despite the virtual certainty that Congress will override this reduction. 

In view of the factors described above, it is important to note that the actual future costs for Medicare are likely to exceed those shown by the current-law projections in this report.  We recommend that the projections be interpreted as an illustration of the very favorable financial outcomes that would be experienced if the physician fee reductions are implemented and if the productivity adjustments and other cost-reducing measures in the Affordable Care Act can be sustained in the long range -- and we caution readers to recognize the great uncertainty associated with achieving this outcome.  Where possible, we illustrate the potential understatement of Medicare costs and projection results by reference to an alternative projection that assumes -- for purposes of illustration only -- that the physician fee reductions are overridden and that the productivity adjustments are gradually phased out over the 16 years starting in 2020. 

The differences between the current-law projections and the illustrative alternative are substantial, although both represent a sizable improvement in the financial outlook for Medicare compared to the law in effect prior to the Affordable Care Act.  This difference in outlook serves as a compelling reminder of the importance of developing and implementing further means of reducing health care cost growth in the coming years. 

Because knowledge of the potential long-range effects of the productivity adjustments, delivery and payment innovations and certain other aspects of the Affordable Care Act is so limited, in August 2010 the Secretary of the Department of Health and Human Services, working on behalf of the Board of Trustees, established an independent panel of expert actuaries and economists to review the assumptions and methods used by the Trustees to make projections of the financial status of the trust funds.  The members of the panel were selected in October 2010 and began their deliberations in November.  They were asked to focus their immediate attention on the long-range Medicare expenditure growth rate assumption.  In its interim report, the panel found that the long-range Medicare growth rate assumptions used in the 2010 report for the current-law projections were not unreasonable in light of the provisions of the Affordable Care Act.  The panel recommended the continued use of a supplemental analysis, similar to the illustrative alternative projection in the 2010 Trustees Report, for the purpose of illustrating the higher Medicare costs that would result if the reduction in physician payment rates and the productivity adjustments to most other provider payment updates are not fully implemented as required under current law. 

The panel members noted the extreme difficulty involved in developing long-range Medicare cost growth assumptions, due to the many uncertainties that surround not only the long-term evolution of the U.S. health care system but also the system’s interaction with the provisions of the Affordable Care Act.  The trustees will continue their efforts, with the assistance of the technical panel, to develop possible improvements to the cost growth assumptions underlying the 2010 Medicare Trustees Report.  As described in section II.C, the 2011 report uses these same long-range cost growth assumptions, pending such improvements. 




Copyright, 1996-2011, 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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