May 13, 2011

Mercatus Scholars on the Annual Medicare and Social Security Trustees Report

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The annual Medicare and Social Security Trustees report, which provides an update on the solvency and cost of the two entitlement programs, was released today. Jason Fichtner, a former Chief Economist at the Social Security Administration, and Veronique de Rugy, a federal budget expert, talk about what to look for in the report and the significance of the changes from last year.

Jason Fichtner

More than 50 million Americans currently rely on Social Security benefits and more than 150 million Americans pay taxes into the program.  The financial health of Social Security is not only important to today’s beneficiaries, but also to today’s workers who will be tomorrow’s beneficiaries.  

For Social Security, the exhaustion date now one year earlier to 2036 from 2037.  For Medicare, the system will now go insolvent 5 years earlier, in 2024 from 2029.

But biggest news is that the cash-flow problems associated with Social Security financing are now permanent.  In 2010, payroll tax revenues alone were no longer enough to cover benefits. This “cash-flow negative” financing position continued into 2011, but was supposed to return to positive cash-flow in 2012 – 2014 before returning to a permanent negative cash flow. Now, the financing of the system is permanently in a cash-flow negative basis. 

Also, in order to achieve 75-year actuarial balance in the Social Security program, payroll taxes would have to be raised today by 2.2 percentage points, from the current 12.4 percent to 14.6 percent. Changes in the actuarial nature of the trust funds usually happen incrementally.  However, the gap was 1.92 percentage points in the 2010 Trustees Report. The increase of 30 basis points to 2.2 percentage points in the 2011 Report is the largest single-year increase in decades

We need to pass reforms now to curtail the runaway open fee-for-service nature of Medicare. For Social Security, we need to raise the retirement age and change COLA so it’s tied to Chained CPI.

Veronique de Rugy

These are some questions we should be asking: What is the date at which Social Security will start running a permanent cash flow deficit, meaning that the taxes we collect in any given year are not enough to pay all retirees’ benefits for that year?  Is that year still 2014? It matters because once we run a permanent cash flow deficit, the Trust Fund will start cashing its IOUs which means that Treasury will have to borrow some money to pay the program back. That adds to our deficit and to our debt.

How did the cut in payroll tax affect the cash flow deficit numbers? The payroll tax cut that resulted from the Tax Deal in December between the Republicans and the president means that less money is currently collected than last year to pay for today’s retirees. How much in the red are we today because of it?

What is the date in which the assets in the trust fund will run dry? So far, the projections are that by 2037 the Trust fund will run out of assets (IOUs) to cash. This means that in 2037 benefits will automatically be cut by 22 percent across the board.  Is that still the date? Will the Trust Fund run out of assets before 2037 and by how much will benefits be cut?