August 17, 2015

The 2015 Social Security and Medicare Trustees' Reports

Mark J. Warshawsky

Former Senior Research Fellow
Summary

In this article, Warshawsky discusses the projected outlook for Social Security and Medicare for 2016, including the forecast insolvency of the disability program and the (un)likelihood of a benefit increase for Social Security recipients.

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The 2015 annual report released on July 22 from the trustees of the Social Security and Medicare trust funds projects a slight improvement in Social Security’s future finances as compared to last year’s projections. This is primarily a result of methodological changes in earnings, tax, and benefit projections, as well as projected slower growth in employer contributions to health insurance premiums, which would lead to an increase in taxable payroll. The disability segment of the program, which has its own trust fund, is still expected to be insolvent in 2016, as benefit payments and enrollment have grown rapidly, even after adjusting for the anticipated aging of the workforce. Hence, unless there is reform of the program or new financing, the law will require a 19 percent cut in disability benefits. 

The 2015 report for Medicare also shows an improvement in the outlook as compared to last year because of a significant change in the methodology, leading to a somewhat slower rate of projected growth in healthcare spending in the out years, even as actual Medicare spending grew noticeably in 2014, particularly for drugs and physicians. Because there was no consumer price inflation in the past year, mainly because of the drop in fuel prices, the trustees forecast that there will be no benefit increase for Social Security recipients in 2016, which means, by law, there will be no increase in either the Social Security taxable wage base (that is, contribution and benefits) or in Medicare Part B premiums for most, but not all, beneficiaries. 

Social Security 

Under current law and absent reform, the Social Security trustees project that the program will suffer cash-flow shortfalls — gaps between payroll and benefit taxes and expenditures — forever. The shortfall was $74 billion in 2014 and is projected to be $84 billion in 2015. Shortfalls will increase rap- idly after 2018 as the pace of baby-boom generation retirements picks up. Note that as recently as 2009, Social Security once represented a positive cash flow to the federal budget, as tax revenue exceeded expenditures. The negative turnaround in program finances hit sooner and deeper than expected. 

The ‘‘theoretical combined’’ trust funds for the old age and survivors insurance (OASI) and the disability insurance (DI) programs (collectively OASDI) are projected to be exhausted of reserves in 2034, one year later than projected last year. At that point, continuing tax revenue would be sufficient to pay 79 percent of scheduled benefits, declining to 73 percent in 2089. The DI trust fund, however, is expected to run out much sooner, by the fourth quarter of 2016. When that occurs, the government must by law reduce disability payouts to 81 percent of scheduled benefits. 

Because the primary source of revenue for Social Security and, to a lesser extent, Medicare, is the payroll tax, the programs’ revenues and costs are traditionally expressed as percentages of taxable payroll — that is, the amount of worker earnings taxed to support the programs. (Note that taxable payroll is almost 25 percent larger for Medicare than for Social Security because the Medicare pay- roll tax is imposed on all earnings, while Social Security taxes apply only to earnings up to an annual maximum — $118,500 in 2015.) The Social Security annual cost rates are projected to increase from 13.99 percent of taxable payroll in 2014 to 16.71 percent in 2040, decline to 16.54 percent in 2050, and then rise gradually to 18.01 percent in 2090. The Social Security revenue rate — which includes payroll taxes at 12.4 percent level and income taxes on benefits — was 12.8 percent in 2014 and is expected to increase slowly over time, to 13.32 percent in 2090, because the amount of Social Security benefits excluded from income taxation is not indexed for inflation and benefit growth. 

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