The 2014 Social Security and Medicare Trustees Reports

The 2014 annual reports released on July 28 from the trustees of Social Security and Medicare (the trustees) show continuing deterioration in Social Security’s finances, primarily because weaker economic growth reduced expected payroll tax revenues. The disability segment of the program —with its own trust fund — is expected to be insolvent in 2016 because benefit payments far exceed past projections, even after adjusting for a fully anticipated aging of the workforce. By contrast, the report for Medicare shows improvement because of a surprisingly slower rate of growth in healthcare spending, particularly in the hospital sector. Still, as the trustees emphasize, Medicare, along with Social Security, places a large and growing burden on federal finances. Therefore, as the Federal Reserve removes its monetary accommodations in the next couple of years, the expected increases in interest payments on federal debt will inevitably put pressure on the budget, leading politicians to seek Medicare and disability benefit cuts as well as revenue increases.

Social Security

Absent significant reform, the trustees project that the program will suffer cash flow shortfalls — gaps between payroll and benefit taxes and expenditures — forever. The shortfall was $76 billion in 2013 and is projected to be $80 billion in 2014; shortfalls will rise rapidly after 2018 with the increase in baby boomer retirements. Note that as recently as 2009, Social Security represented a positive cash flow to the federal budget, as tax revenues exceeded expenditures. The turnaround in program finances was sooner and deeper than expected.

The combined trust funds for old age, survivors (OASI), and disability insurance (DI) programs (collectively, OASDI) are projected to be exhausted of reserves in 2033. At that point, continuing tax revenue would be sufficient to pay 77 percent of scheduled benefits, declining to 72 percent by 2088. The DI trust fund, however, is expected to run out by 2016. At that point, the government must reduce disability payouts to 81 percent of scheduled benefits. Figures 1 through 3 give the trust funds’ exhaustion dates projected (under the intermediate assumptions) in the annual trustees’ reports since 1983, the year of the last major program reform. Note that in 1995, Congress reallocated contribution rates between the OASI and DI trust funds to remedy the expected financial shortfall in the DI Trust Fund, when the OASI Trust Fund was relatively flush. Since 2003-2004, the exhaustion dates of the trust funds have steadily moved closer, as conditions and prospects have been worse than originally expected.

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