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The Financial Future of Social Security and Medicare

A preview of the Social Security and Medicare Trustees’ reports

Nearly 61 million Americans receive benefits from Social Security and since its inception, the program has lifted millions out of poverty, helping to reduce the poverty rate among older Americans from 30 percent in 1966 down to 9 percent in 2015. Medicare is similar in both scale and importance; of its 55 million beneficiaries, about 45 percent have annual incomes below $25,000.

In total, the federal government spent nearly $1.5 trillion on Social Security and Medicare in 2016, and regardless of policy disagreements surrounding the programs, one thing remains clear: their current and future financial status is of the utmost importance, both to the government and public of the United States.

For this reason, the Boards of Trustees for Social Security and Medicare release annual reports detailing the financial health of these programs. While invaluable, these reports are hundreds of pages long, and can seem impenetrable without significant prior program knowledge or expertise. To assist policymakers and the public in the interpretation of these lengthy and technical documents, BPC is providing a platform to the former public trustees for Social Security and Medicare, Charles P. Blahous III and Robert Reischauer, to provide bipartisan, independent analysis of the programs’ finances. In preparation for the upcoming 2017 Social Security and Medicare Trustees’ reports, Blahous and Reischauer have produced a preview brief highlighting some key facts, figures, and analysis to look for when the trustees’ reports are published.

In total, the federal government spent nearly $1.5 trillion on Social Security and Medicare in 2016… their current and future financial status is of the utmost importance.

Before offering detailed program analysis, the trustees’ reports provide background information on how Social Security and Medicare are funded and the beneficiaries they serve. The table below presents an overview of the differences between the two programs across their benefits and financing. For Medicare Hospital Insurance (HI) and Social Security Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), the main revenue source is payroll taxes, while for Medicare Supplementary Medical Insurance (SMI), the financing primarily comes from general government revenue and premiums paid by and on behalf of participants. In terms of benefits, OASI and DI offer cash benefits, while both HI and SMI offer in-kind benefits, although of different varieties (as described below).

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Trustees Table 1

Trust FundNumber of Beneficiaries (Millions)Benefits FinancedPrimary Financing MechanismPayroll Tax Rate
OASI (Social Security)50.3Retired workers, their families, survivorsPayroll tax10.03 percent
DI (Social Security)10.6Disabled workers, their familiesPayroll tax2.37 percent*
HI (Medicare, Part A)55.1Hospital, home health following hospital, skilled nursing facilities, hospicePayroll tax2.90 percent
SMI (Medicare, Parts B and D)50.7 and 41.8Physician, outpatient hospital, home health, drug coverageGeneral government revenue and premiums paid by and on behalf of participantsN/A
*This rate is temporary, enacted by the 2015 Bipartisan Budget Act to address then impending DI trust fund depletion; the rate will drop to 1.8 percent on January 1, 2019 (and the rate for OASI will increase commensurately).

A wide array of sustainability metrics are published in the trustees’ reports (many of which can be found in Appendix A of the preview brief), but the following are a few key data points we will be paying particular attention to when the reports are released in the coming weeks.

  • Changes in the trust funds’ funding shortfalls: The trustees’ reports include a projection of how much each trust fund’s costs exceed its income in the long-term. We will be looking to see if changes in economic, demographic, or programmatic assumptions have increased or decreased the various trust funds’ financing shortfalls over the past year.
  • The size of changes needed for trust fund solvency: An easy way to understand the size of the trust fund shortfalls are through the changes in benefits or taxes needed to eliminate the shortfalls. Without policy changes, those necessary adjustments generally increase over time, and the larger they grow, the harder it will be for policymakers to fix the problem.
  • Trust fund depletion dates: Medicare’s HI and Social Security’s OASI and DI trust funds are not allowed to borrow. Consequently, when they run out of funds, they must delay payments, essentially cutting program benefits and medical provider payments. If the anticipated depletion dates are sooner than they were projected to be in 2016, that would signal a worsening of the trust funds’ financial position, and vice versa.

Last year’s results for these metrics are summarized in the table below. We will be analyzing any changes in these metrics when the 2017 trustees’ reports are released this summer.

Trustees Table 2

Question2016 Trustees’ Reports
What are the actuarial deficits for OASI, DI, and HI? The actuarial deficits (program income minus program costs) are the programs’ annual trust fund shortfalls, averaged over 75 years, expressed as a percentage of workers’ taxable wages.
• OASI Actuarial Deficit: 2.39 percent of Taxable Payroll
• DI Actuarial Deficit: 0.25 percent of Taxable Payroll
• HI Actuarial Deficit: 0.73 percent of Taxable Payroll
What sizes of adjustments to benefits and/or taxes are needed today to restore Social Security and Medicare to long-term solvency?• Social Security: Benefits would be reduced by 16 percent or payroll taxes would be increased by 2.58 percentage points.
• Medicare: Benefits would be reduced by 16 percent or payroll taxes would be increased by .73 percentage points.
Are any of the trust funds facing near or long-term depletion? • OASI Trust Fund Depletion Date: 2035
• DI Trust Fund Depletion Date: 2023
• HI Trust Fund Depletion Date: 2028

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