Social Security's new report has a clear message

"Neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers." That's the clear message in the opening lines of the 2014 annual reports of the Social Security and Medicare boards of trustees.

The program most in jeopardy is Disability Insurance (DI), which is part of Social Security. The trustee report estimates the DI trust fund will be depleted late in 2016. Considering both Social Security retirement and disability benefits, the report estimates that the combined trust fund will be depleted in 2033.

This doesn't mean Social Security benefits will stop altogether in 2033. If these trust funds are depleted, according to current law, Social Security benefits must be reduced to the level that's supported by the amount of FICA taxes being collected from workers at that time. The trustee report estimates that tax income will be sufficient to cover about three-quarters of all scheduled benefits at that time.

But there's no doubt that benefit reductions of about 25 percent will be very disruptive to retirees because Social Security benefits are the largest source of income for most of them.

The trustees also report that the Medicare Hospital Insurance (HI) Trust Fund will be depleted in 2030. At that time, dedicated revenues, which cover hospital and inpatient expenses, will pay about 85 percent of projected HI costs.

Part B of Medicare covers physician and outpatient expenses. General government revenues pay for about three-quarters of Part B, while premiums collected from current retirees pay for the rest. The trustees project that Part B costs will increase from 1.9 percent of GDP in 2013 to about 3.3 percent by 2035. The trustees also project that total Medicare costs, including both hospital and Part B outpatient services, will increase from 3.5 percent of GDP in 2013 to 5.3 percent of GDP by 2035.

The long-term deficit of Social Security's retirement and disability benefits is about 2.88 percent of taxable payroll. This means some combination of tax increases and benefit reductions with a total value of 2.88 percent of pay would put the program into financial balance. The long-term deficit of the HI program is about 0.87 percent of payroll.

While the dollar numbers of the deficit are staggeringly large, when expressed as a percentage of payroll, it seems that finding benefit reductions and tax increases in the magnitude of 2.88 and 0.87 percent of pay should be possible.

In 2013, the combined cost of the Social Security and Medicare programs equaled 8.4 percent of U.S. GDP. The trustees project this total cost will increase to 11.5 percent of GDP by 2035 and 13 percent by 2088. Once again, while the dollar amounts are very large, it seems that some combination of tax increases and benefit reductions with a total value of 3.1 to 4.6 percent of national output should be possible.

The Social Security projections depend on a number of demographic and economic assumptions about the future that may -- or may not -- turn out to be accurate. The projected Social Security and Medicare shortfalls are large enough that long-term funding challenges are likely, even under future scenarios that are more favorable than the assumptions the actuaries used.

Therefore, we shouldn't just hope and wish that the funding problems will somehow go away. It's dangerous to think that the projections are just a bunch of meaningless numbers.

But exactly why should we believe the board of trustees? Because they're smart people who take their job seriously.

Of the six trustees, four serve as a result of their position in the federal government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human services, and the commissioner of Social Security. The president appoints other two trustees with Senate confirmation. They are Charles P. Blahous, a research fellow at the Hoover Institution, and Robert Reischauer, president emeritus of the Urban Institute.

Actuaries who work in the Social Security Administration do the work of preparing these projections. I've met a few of them, and I've found them to be very intelligent people who know their subject very well. They're dedicated public servants who are keenly interested in the long-term viability of Social Security.

Citizens and lawmakers alike would do well to pay attention to the clear messages from the trustees report. The conclusion of the report's cover letter says it well:

"Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare."

Lawmakers, are you listening?

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

Comments

Market Data

Market News

Stock Watchlist