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Trustees Reports Highlight Social Security, Medicare Trust Fund Challenges

Thursday, July 13, 2017

Washington, D.C. – The trustees for Social Security and Medicare today released their annual reports, providing an update on the financial conditions of the programs’ trust funds. Continuing the trend of recent years, the reports highlight the significant financial challenges that each program continues to face. 

The trustees for these programs are supposed to include two individuals, not of the same political party, who are tasked with providing public accountability and oversight. These positions, however, have gone unfilled since 2015. BPC has partnered with Charles Blahous of the Mercatus Center at George Mason University and Robert Reischauer of the Urban Institute, the most recent former public trustees for Social Security and Medicare, to provide independent analysis of the programs while the public trustee positions remain unfilled.  

“The trustees’ annual reports provide the public with an objective, sophisticated perspective on the financial status of the programs,” Reischauer said. “While the projections have changed slightly from last year, the overall message is the same: policymakers need to act to shore up the programs—through changes to spending, revenues, or a combination of both—to avoid even more drastic measures when the trust funds run out.” 

The trustees updated their projected estimates of the trust funds’ respective financing gaps, continuing to present an ominous outlook for the financial sustainability of the funds. 

By the time these programs’ trust funds are depleted, it will be too late to shield vulnerable program participants from substantial harm.

“By the time these programs’ trust funds are depleted, it will be too late to shield vulnerable program participants from substantial harm,” Blahous said. “To avoid disruptive consequences for beneficiaries and taxpayers alike, lawmakers will need to enact financial corrections much sooner.” 

The projected long-range shortfall in Social Security’s combined trust funds is now estimated at 2.83 percent of taxable payroll, substantially larger than the shortfall closed in landmark 1983 reforms. Closing that shortfall today by raising Social Security’s payroll tax rate would require that it be immediately increased from 12.4 percent to 15.2 percent. Alternatively, eliminating the shortfall through benefit reductions for future beneficiaries would require a reduction of 20 percent. The size of the reforms needed to address these shortfalls will continue to grow the longer policymakers delay action. 

Medicare’s financing challenges are different, but also serious. The trustees’ Medicare report indicates that growing costs continue to strain Medicare’s Hospital Insurance (HI) trust fund, as well as the broader federal budget. The HI trust fund shows a substantial shortfall of 0.64 percent of taxable payroll, which would require immediate spending reductions of 14 percent to close in the absence of additional revenue. Medicare’s Supplementary Medical Insurance trust fund is balanced annually through general government revenues and premium assessments, so its cost growth is projected to place increasing pressure on government finances as well as on premium-paying beneficiaries, who cover roughly one-quarter of the costs.   

Last month, Blahous and Reischauer issued a guide to the 2017 trustees reports, highlighting key data points that deserve attention. In the coming weeks, they will prepare a more detailed analysis of the reports released today using the principles outlined in their guide.