Expert Commentary

2012 Social Security and Medicare trustees report

2012 report from the federal government on the solvency and long-term forecasts of entitlement programs in the United States.

The 2012 forecasts from the trustees of the Social Security and Medicare programs predict gloomier financial prospects for Social Security compared to last year’s projections, while the outlook for Medicare has remained mostly unchanged from 2011. The two programs constitute nearly 36% of federal spending in 2011, and both have serious long-term financial challenges because of demographic shifts: “Through the mid-2030s, population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP.”

The 2012 overview report states that in 2011, 44.8 million people received Social Security benefits, 10.6 million received disability insurance benefits and 48.7 million were covered under Medicare.

The report’s findings include:

  • The projected year of asset exhaustion for Social Security has been moved forward by three years, to 2033. The Old-Age and Survivors Insurance (OASI) trust fund will be exhausted by 2035, while the Disability Insurance (DI) trust fund will run out of assets by 2016. Income for the Social Security trust fund will remain higher than costs until 2021, beyond which assets owned by the trust fund will cover deficits, though only until 2033.
  • The long-term deficit in the Social Security program has worsened since the 2011 report. The deficit is expected to be 2.67% of taxable payroll — the highest recorded since the last major Social Security financing reforms three decades ago. Much of the financial deterioration is caused by updated economic assumptions, weak economic performance and higher-than-expected inflation in 2011.
  • Short-term financial adequacy measures (testing whether the trust fund has adequate assets to cover a year’s worth of costs) show that the OASI trust fund will remain financially adequate for the period 2012-2021. Short-term forecasts for the DI trust fund show assets falling short starting in 2013 and being exhausted by 2016, two years earlier than previously estimated.
  • Because taxes are a major source of program funding, the deficit of Social Security costs relative to tax income was $148 billion in 2011 and was projected to be $165 billion in 2012. The size of the deficit is primarily due to the temporary reduction in payroll taxes. The deficit of Social Security costs relative to non-interest income was $45 billion in 2011; it is expected to decline further to $53 billion in 2012.
  • The annual cost of Social Security benefits as a share of taxable earnings is projected to grow from 11.3% in 2007 to 17.4% in 2035; as a share of GDP, program costs are projected to rise from 4.2% in 2007 to 6.4% in 2035.
  • The projected date of asset exhaustion for the Medicare Hospitalization Insurance (HI) trust fund remains 2024. Medicare’s costs as a share of GDP are projected to rise from 3.7% in 2011 to 5.7% in 2035. A deficit of $38 billion in non-interest income is projected for 2012, and HI costs are projected to grow to 5.82% of taxable payroll in 2050. Supplementary Medical Insurance (SMI) costs are estimated to increase from 2% of GDP in 2011 to 3.4% in 2035. Estimates of Medicare costs assume implementation of a 31% reduction in physician rates, something considered highly unlikely.

The report notes that once assets have been depleted, tax revenues alone will be insufficient to meet scheduled benefits. Congress will then be faced with the choice of either raising taxes or decreasing benefits: “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.”

Tags: economy, Congress, campaign issue, aging

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