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A Guide to the 2017 Social Security and Medicare Trustees’ Reports

Wednesday, October 11, 2017

the Report

The public trustees for Social Security and Medicare have been essential to the oversight of program finances since the official positions were established in 1983. These individuals are tasked with ensuring that the trustees’ reports for Social Security and Medicare—the primary sources of information on the programs’ finances—are developed in an objective manner.

Unfortunately, for the past two years, the public trustee positions have gone unfilled. As the most recent holders of these positions, we have partnered with the Bipartisan Policy Center to provide independent analysis of the trustees’ reports while the positions remain vacant.

Our review of the trustees’ 2017 annual reports on the financial conditions of Social Security and Medicare has led to the following conclusions:

Both Social Security and Medicare face substantial and certain financing problems that will continue to worsen until corrective legislation is enacted. Social Security’s combined trust funds currently face a long-range (75-year) financing shortfall equal to 17 percent of projected program costs, while the Medicare Hospital Insurance (HI) program faces a long-range shortfall equal to 14 percent of its projected costs. As these respective trust funds near depletion, their deficits will become larger and more difficult to correct. This is especially true for Social Security, for which 23 percent of benefits would lack financing at the point of combined trust fund depletion in 2034, gradually increasing to 27 percent 75 years from now. Because Medicare’s Supplementary Medical Insurance (SMI) trust fund is financed largely from general government funds rather than a separate payroll tax in the manner of the other trust funds, its growing costs will place mounting pressure on the federal budget over the coming decades. Lawmakers’ current posture of inaction with respect to Social Security and Medicare finances is clearly untenable.

The window of opportunity for repairing Social Security and Medicare finances is closing. The trustees’ reports document how various strategies for addressing program shortfalls will become increasingly impractical if program finances are not addressed soon. For example, policymakers have historically enacted changes to strengthen these programs’ finances without decreasing the benefits of individuals already receiving them. If policymakers took this approach today, closing the Social Security shortfall without raising taxes would require a benefit reduction of 20 percent for those becoming eligible after 2017. If action were delayed until 2034, when Social Security’s trust funds are depleted, only changing benefits for newly eligible beneficiaries (even 100 percent reductions in benefits) would be insufficient to maintain continuous trust fund solvency. Alternatively, pursuing solvency through payroll tax rate increases, starting in 2034, would require the combined employer-employee Social Security tax to increase from 12.4 percent to 16.4 percent. Similarly, a Medicare HI tax increase from 2.9 percent to 3.7 percent would be needed at its point of depletion in 2029— which would result, along with the aforementioned Social Security payroll tax increase, in a total payroll tax rate exceeding 20 percent.

Further delaying fixing program finances will almost certainly result in solutions that both sides of the American political spectrum regard as unacceptable, and far less tolerable than the available policy options—unpalatable though they may appear—if action were taken sooner. Continued delay reduces the cost savings achievable by prospective changes to Social Security benefits and Medicare insurance payments, thereby increasing the programs’ revenue needs. Because of this, policy advocates who oppose payroll tax increases should favor compromise approaches that stabilize program finances before revenue requirements mount further. At the same time, the objectives of policy advocates who want to protect benefits from reductions are similarly jeopardized by further delay. This is because as the funding shortfalls for these programs grow, the size of the payroll tax increases needed to close them will become impractically large. This limitation will unavoidably lead to larger reductions in benefit payments, or a bailout from the general government fund. Were Social Security or Medicare HI to be financed significantly from general revenues, these programs would be forced to compete annually for funding against other government priorities, while the longstanding political protections—that thus far have shielded beneficiaries from sudden changes to benefit levels and eligibility rules—would be sacrificed. Thus, the policy interests of both sides of the American political spectrum will be harmed by continued delay.

Risks of inaction are greatest for economically vulnerable Americans. Projections by BPC’s Commission on Retirement Security and Personal Savings (referred to hereafter as “the commission”) show that in the absence of legislated corrections to Social Security’s financial shortfall, the poverty rate among Americans aged 62 and older will increase by over 20 percent in 2035 relative to recent levels. This increased incidence of poverty would be greatest among historically disadvantaged groups, including African Americans and those lacking a high school education. Policymakers face difficult trade-offs: reducing program benefits risks undermining income security, whereas solutions based entirely on tax increases risk lowering workforce participation as well as worker standards of living, particularly for vulnerable populations. Retirement security proposals made by the commission demonstrate there is still time to enact a solution that would repair program finances while reducing poverty among elderly Americans and improving the program’s work incentives.

Medicare and Social Security are placing increasing pressure on the federal budget. The challenges of financing Medicare and Social Security are substantial and continue to grow, even though trust fund insolvency is a number of years away. The latest trustees’ report summary finds that the combined general revenue needs of the two programs in 2017 equals $311 billion, with the vast majority of this consisting of the general revenue financing for Medicare SMI. Increasing SMI costs and general fund payments to meet other program revenue commitments (such as interest payments and bond redemptions) will place increased pressure on the general fund in future years.

ABOUT THE AUTHORS

Charles P. Blahous III and Robert D. Reischauer, the most recent public trustees of the Social Security and Medicare trust funds have reprised their roles through a new platform at the Bipartisan Policy Center by continuing to provide independent appraisals of the programs’ finances. 

KEYWORDS: MEDICARE, MEDICAID, SOCIAL SECURITY, COMMISSION ON RETIREMENT SECURITY AND PERSONAL SAVINGS, CHARLES BLAHOUS, ROBERT REISCHAUER

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