Americans just got the latest status update on the Social Security and Medicare trust funds. In their report, the funds' trustees made very clear and blunt recommendations:
"Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing. Lawmakers have a broad continuum of policy options that would close or reduce the long-term financing shortfall of both programs. The Trustees recommend that lawmakers take action sooner rather than later to address these shortfalls, so that a broader range of solutions can be considered and more time will be available to phase in changes while giving the public adequate time to prepare."
The report provides plenty of facts and figures that illustrate the challenges facing these programs.
Over the course of Social Security's 80-year history, it has collected roughly $19 trillion in payroll taxes and other revenue, and it has paid out $16.1 trillion in benefits and other expenses. This leaves asset reserves of more than $2.8 trillion at the end of 2015 to help pay for future benefits.
There are actually two separate trust funds -- one for old age and survivor income (OASI) and one for disability income (DI) -- but the trustees have traditionally focused on the financial status of the hypothetically combined funds (OASDI). The trustees project that the combined trust fund will be depleted in 2034, the same year that their 2015 report projected.
According to current law, if the trust fund is depleted, benefits must be reduced to the level that could be supported by payroll taxes paid by workers at that time, which would equal approximately 79 percent of scheduled benefits.
While the projected depletion date generates scary headlines, it's important to remember that benefits paid to retirees wouldn't fall to zero at that time. In aggregate, retirees would receive a haircut of about 21 percent of scheduled benefits. That's certainly not good news, but retirees won't be wiped out entirely as the scaremongers imply.
Social Security's long-term deficit is 2.66 percent of taxable payroll, which is the estimated value of a combination of tax increases and benefit constraints that could close the system's long-term deficit. While the dollar amounts of the shortfall are in the billions and trillions of dollars, the percentages seem small: 2.66 percent of payroll is less than 3 cents on the dollar.
Social Security's costs represent 5 percent of U.S. GDP in 2015, rising to 6 percent by 2035 and fluctuates around that number until 2090.
Another key date for the Social Security program is 2020, when the program's income from payroll taxes and interest income from the trust fund falls short of projected benefits to be paid to out. At that time, the principal from the trust fund would need to be withdrawn to help pay for benefits.
The Medicare program also has two separate trust funds: the Hospital Insurance (HI) trust fund, which pays for in-patient hospital expenses, and the Supplementary Medical Insurance (SMI) trust fund, which pays for outpatient expenses, including physicians, home health, prescription drugs and other services.
The trustees project that HI will be depleted in 2028, two years earlier than projected in the 2015 report. At that time, revenues will be sufficient to pay for 87 percent of in-patient costs. The HI program's long-term deficit is 0.73 percent of taxable payroll, or less than 1 cent on the dollar.
The trustees project adequate funding indefinitely for both Medicare Part B (which pays doctors' bills and other outpatient expenses) and Part D (which pays for prescription drugs) that are paid from the SMI fund.
That's because current law provides financing from general government revenues and premiums paid by beneficiaries. General government revenues pay for roughly three-quarters of these costs, with premiums covering most of the remainder. Both government revenues and premiums can be adjusted to pay for cost increases. The aging population and rising health care costs cause projected costs to increase from 2.1 percent of GDP in 2015 to approximately 3.5 percent in 2037.
The trustees estimate that the combined cost of the Social Security and Medicare programs will be equal to 8.6 percent of GDP in 2016. They project that this cost will increase to 11.5 percent by 2035 and to 12.1 percent by 2090, mostly attributable to Medicare.
The report also estimates the future costs of the Social Security and Medicare programs that aren't covered by dedicated payroll tax revenues. In 2016, this cost was a little over 2 percent of GDP, with SMI benefits the largest component by far. By 2040, this cost will be a little over 4 percent of GDP, with a growing portion attributed to the OASDI program.
This represents the future costs of the Social Security and Medicare programs that will need to be supported by some combination of new taxes or new government borrowing, assuming the current schedule of benefits remains. If Congress enacts future benefit constraints, it would reduce these additional costs.
While the dollar numbers involved with the Social Security and Medicare programs seem gigantic, the cost percentages indicate it's reasonable that a combination of revenue increases and benefit constraints can put these valuable programs on a sound financial footing.
As the trustees make clear, lawmakers have a broad range of feasible policy options to consider. The question is: Can they put aside their partisan differences and develop compromise solutions to save these popular and essential programs?