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Analysts: Medicare Insolvency Looms, But Social Security Poses Bigger Threat

U.S. News & World Report logo U.S. News & World Report 6/13/2018 Gabrielle Levy

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A pair of recent reports advanced projections for the depletion date of Medicare by three years while forecasting that Social Security has the funds to stay solvent for eight years beyond that. But the timeline doesn't tell the whole story. While the threat to Medicare may be more imminent, analysts say the crisis facing Social Security is likely more severe.

The annual report released last week says the Hospital Insurance Trust Fund, which provides the financing behind Medicare payments, will fall into the red in 2026 – three years earlier than a similar report last year projected. The Social Security trust fund, meanwhile, won't run out until 2034 under current law. 

But the Medicare shortfall would not result in a total implosion of payments, according to Centers for Medicare and Medicaid Services Chief Actuary Paul Spitalnic. Spitalnic said at a recent panel hosted by the American Enterprise Institute that in 2026, while the Medicare trust fund is projected to be insolvent, it will still have the money to pay an estimated 91 percent of costs.

"Not all of [the trust fund] shuts down, but there is a gap between what's coming in and what's paid out," he said.

Social Security's shortfall when it becomes insolvent, meanwhile, will be much larger: Around a quarter of payments would not be covered by payroll taxes that make up the bulk of the program's income.

According to Charles Blahous, who served as a public trustee of Social Security from 2010 to 2015 under President Barack Obama and had previously worked for several Republican members of Congress, the projected gap means that the later Social Security depletion date is misleading – and risks allowing inaction well past the point of no return.

"By the time that date rolls around, the system is so far gone that you cannot, with any plausibility, restore it to solvency within the confines of its historical financing structure," he tells U.S. News.

Both the Social Security trust fund and Medicare's hospital trust fund are financed primarily through payroll taxes, but because of a variety of structural factors – the age of the funds, the differing sizes of the annual revenue and benefit payouts – Social Security has a much larger build-up of money in its trust fund than Medicare does, which only has about the value of eight months of payments in reserve. But Medicare's shortfall is also relatively small compared to what Social Security's would be if no action is taken.

That created some optimism among conservative and liberal experts at the American Enterprise Institute event that Congress can step up to address the looming trust fund shortfall before it Medicare is threatened.

"The [Medicare] trust fund hasn't gone bankrupt in the last half-century, and I can't imagine that it will go bankrupt in the next half-century," said Robert Moffit, of the Center for Health Policy Studies at the conservative Heritage Foundation think tank.

"Medicare has serious financial challenges," he added. "It's better to address them sooner rather than later, and Congress is going to have to come to grips with this."

Stephen Zuckerman, of the liberal Urban Institute, agreed: "History tells us that action has always been taken … to keep the [trust fund] solvent."

Doing the same with Social Security will be far more challenging – especially as time goes on.

In the past – particularly at a point in the early 1980s in which the Social Security trust fund nearly went bankrupt – Congress has acted to shore up the program, making cuts to benefits and raising taxes. Blahous says that approach won't work this time and that to do so would "inflict near-term pain that is … just not realistic."

Short of some immediate action to address it, like cutting benefits or raising the eligibility age – which Blahous says he doubts is in the offing – the financial structure behind Social Security may have to be completely revamped, which presents its own problems.

Under the present system, Social Security and Medicare's trust funds have dedicated funding streams that don't have to be appropriated by Congress every few years, and therefore aren't subject to the political whims of lawmakers under pressure to find areas of the budget to trim.

But if Congress concludes that the present system no longer raises adequate funding to meet Social Security and Medicare obligations, then it may opt to pay for the programs through the general Treasury fund instead – opening them up to the political pressures that so often plague other federal programs.

"There's a biannual exercise in how much are people who pay income taxes willing to pay other people's benefits that they themselves don't receive," Blahous says. "We don't have those political dynamics in Social Security because there's a sense that everyone's in it, everyone's getting something that they themselves paid for."

That all goes away, he says, when you go to a system in which politics can encroach on entitlement spending. Whatever action lawmakers settle on needs to be taken quickly, Blahous says, because the eventual price tag is compounding in the meantime.

"It's so late in the game with respect to corrections that the shortfalls of the Social Security trust fund are of such a magnitude that the window of opportunity to close them in any practical way has been in the process of closing for several years," he says. "Each succeeding year that goes by without action is really bad news, and while the basic picture doesn't change, the size of the corrections you need to fix it just get further and further beyond the bounds of political plausibility.

Copyright 2017 U.S. News & World Report

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