SoSec, Medicare trust funds going bust

It's that time of the year when the trustees of the Social Security and Medicare trust funds tell us what we already know and don't want to hear -- both are going to run out of money if Congress doesn't act to shore them up, either by increasing contributions or cutting benefits or both. Baby boomers make up the first generation to have contributed to both their entire working careers, and with longevity being what it is stand to reap far more than they have contributed to date. The latest trustees report, issued last week, says both trust funds suffered in the last year -- albeit for different reasons. "The actuarial deficit in the Medicare Hospital Insurance program increased primarily because the trustees incorporated recommendations of the 2010-11 Medicare Technical Panel that long-run health cost growth rate assumptions be somewhat increased. The actuarial deficit in Social Security increased largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers," the report said. All is not lost, the trustees said, provided Congress acts soon. "If they [lawmakers] take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits," the report said. Social Security and Medicare are the two largest federal programs, accounting for 36 percent of fiscal 2011 spending, and that only is going to increase as baby boomers age with actuarial estimates putting the number of retirees at 81 million by 2030, compared with today's 47 million. Among the factors hurting the Social Security trust fund was the payroll tax reduction, which cut $103 billion in 2011 and a projected $112 billion in 2012. If nothing is done, the system will run out of money in 2033 -- just as generation X approaches retirement. For the Medicare HI trust fund, the situation is even more dire, with it projected to run out of funds in 2024. Third-rail, here we come. It has long been accepted as a truism that if politicians tamper with Social Security, they will be committing political suicide. But the Journal of the American Taxation Association says that sells voters short. If the argument was framed differently, results of an experiment published by the journal indicate, people would jump on board. "The crux of our study is that people could very well respond to a clear and forthright presentation of this problem much as they have responded in the past to such national crises as wars or natural disasters," said Professor Timothy J. Rupert of Northwestern University, one of the study's authors. In other words, if taxpayers are more worried about the sustainability of the system, they'd be more willing to accept changes to make sure it survives. The experiment involved 159 accounting students broken into three groups -- one was told Social Security shelled out less than it took in (cash basis), the second group was told it shelled out more (accrual) and the third group was given no specifics. "The accrual-basis group was not only more concerned about the system than the two other groups, but was considerably more favorable to increasing the Social Security tax rate," the study found. "On a scale of 1 [strongly disagree with increasing the rate] to 7 [strongly agree], the accrual-basis participants averaged 4.35, which was about 25 percent higher than the mean for the control group [3.51] and about 20 percent higher than the mean for the cash-basis group [3.64]." That second group also "was considerably more willing to assume the burden for financially strengthening the system than the two other groups were," the study indicated. "Increased concern over the system's future fosters increased willingness to self-sacrifice only up to a point. Most accepting were the 44 participants whose concern about the system's future was 6 on a scale of 1 to 7. Their willingness to sacrifice their own interest was not only a lot higher than that of participants who were less concerned but marginally higher [than] that of the 52 participants who rated their concern at the maximum level of 7." When it comes to Medicare, the Heritage Foundation notes unfunded promised benefits currently stand at nearly $37 trillion and suggests a two-stage reform effort. "During the first stage, a five-year transition period, Congress should … add a catastrophic benefit and restructure the role of supplemental insurance, gradually increase the beneficiary share of Medicare premiums, restructure the existing taxpayer subsidies for upper-income retirees, and gradually phase out the subsidies for the wealthiest Americans. … Congress could also earmark all savings exclusively for Medicare, secure the solvency of the Medicare Hospital Insurance trust fund, permanently fix the Medicare physician payment system, gradually raise the age of eligibility to 68 over 10 years, and remove restrictions on the ability of doctors and patients to contract privately for medical services," Heritage recommends. "In the second stage, after a five-year transition, Congress should unify all of the parts of Medicare into a single plan financed with a single premium and a unified trust fund, create a new system of insurance rules and consumer protections similar to those in the popular and successful Federal Employees Health Benefits Program and establish a uniform 'premium support' system to finance the entire system."