Note: This article is the third in a series of ten articles addressing the future of slow GDP growth, high Federal debt, and strained household finances.
The CMS trustees released their reports on the financial status of Medicare and Social Security dated July 13, 2017. They also released a summary of the more detailed reports, linked below. According to the summary, "Social Security and Medicare together accounted for 42 percent of Federal program expenditures in fiscal year 2016." "Both Social Security and Medicare will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment."
1) We're facing increasing Medicare costs which will exceed revenues as the 76m Boomers retire.
2) The fund which pays hospital and nursing home costs (HI fund) will be depleted by 2029 and run a deficit thereafter, based on the July 13, 2017 CMS Trustees report on Medicare and Medicaid.
3) Once the fund balance is depleted (projected 2029 per above), projected revenue inflows will be only 88% of expenditures for the HI fund.
Per page 29: "The percentage of expenditures covered by non-interest income is projected to decrease from 88 percent in 2029 to 81 percent in 2041 and then to increase to about 88 percent again by the end of the projection period." (The end of the projection period is 2091).
Per footnote 20 on page 23: "After asset depletion in 2029, as described in section II.E, no provision exists to use general revenues or any other means to cover the HI deficit."
4) Medicare's other primary fund, the SMI fund which pays doctors' reimbursements and funds Medicare Part D (drugs), faces similar funding issues. It is subsidized by the Federal government's general budget.
"The interrelationship between the Medicare program and the Federal budget is an important topic—one that will become increasingly critical over time as the general revenue requirements for SMI continue to grow. Transfers from the general fund are the major source of financing for the SMI trust fund..." (pgs 22-23).
"The Trustees project that both the Part B and Part D accounts of the SMI trust fund will remain in financial balance for all future years because beneficiary premiums and general revenue transfers are assumed to be set at a level to meet expected costs each year. However, SMI costs are projected to increase significantly as a share of GDP over the next 75 years, from 2.1 percent to 3.7 percent under current law." (Page 40)
Because SMI is subsidized by the Federal operating budget, it's important to consider how much will be required for transfer from the Federal government over time.
Note that for 2017, the SMI subsidy is 15.7% of income taxes, rising to 21.1% by 2030, 23.6% by 2040, and 24.8% by 2091. (Per table on page 39). By any measure, this increased SMI subsidized funding burden will put significant additional pressures on future Federal operating budgets.
SOCIAL SECURITY COSTS
Social Security is paid from two funds: the Disability Insurance benefits (DI fund), and the more common Old Age and Survivors' Insurance retirement payments (OASI Fund).
From the CMS trustees summary report for 2017, they refer to the two funds as combined using the term 'OASDI funds': "...However, to summarize overall Social Security finances, the Trustees have traditionally emphasized the financial status of the hypothetical combined trust funds for OASI and DI. The combined funds-designated OASDI..." Trustees Report Summary
For the OASDI fund, "...The interest income and redemption of trust fund asset reserves from the General Fund of the Treasury will provide the resources needed to offset Social Security's annual deficits until 2034, when the OASDI reserves will be depleted. Thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2091." Trustees Report Summary
Note that the Trustees summary pertains to the more detailed report dated July 13, 2017. https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/Downloads/TR2017.pdf
Let's look at the CBO's report for the Social Security funds dated December, 2016. It shows an even worse projection, projecting only 71% (vs 'about three-quarters', per the CMS report) of expenditures to be funded by revenues beginning after 2029.
"OASI payments accounted for about 84 percent of those outlays, and DI payments made up about 16 percent." (In 2016). (Page 2).
"If current laws governing taxes and spending stayed the same and if benefits were paid as scheduled, outlays for the Social Security program would rise from 5.0 percent of gross domestic product (OTC:GDP) in 2016 to 5.9 percent in 2026 and to 6.3 percent in 2046; they would exceed tax revenues by 33 percent in 2026 and by 42 percent in 2046." (Page 2).
"According to CBO’s projections, without changes in the programs, the balance of the DI trust fund will be exhausted in fiscal year 2022, the balance of the OASI trust fund will be exhausted in calendar year 2030, and the combined balances of the OASDI trust funds will be exhausted in calendar year 2029." (Page 2).
"In 2030, when revenues for the two trust funds combined are projected to equal 71 percent of scheduled outlays, payable benefits thus would be 29 percent below scheduled benefits." (Page 8).
In short, the CBO projects that under current law, Social Security benefits are underfunded and by 2029 will receive in revenues only enough to pay 71% of projected expenses.
"If current laws governing Social Security remain in effect, the OASI trust fund will be exhausted in 2030, CBO estimates. In 2031, therefore, benefits would need to be reduced by 31 percent from scheduled amounts if outlays were limited to revenues credited to the trust fund." (Page 9).
"Under current law, the DI trust fund will be exhausted sooner—in fiscal year 2022, according to CBO’s projections. If the program’s outlays were limited thereafter to revenues credited to the trust fund and if the Social Security Administration reduced DI benefits accordingly, payments to beneficiaries in fiscal year 2023 would be 20 percent less than the amounts scheduled under current law, CBO projects." (Page 9).
1) Both Medicare funds (HI and SMI) are underfunded, based on projections for revenues and expenditures. The HI fund balance will be depleted by 2029. From 2029-2041, HI fund revenue inflows will only cover 88% of projected expenses.
2) Therefore, any health care company relying on Medicare for a substantial part of its income will face challenges to increase its revenues annually, absent a major change by the Federal government to fill the 12% funding gap. This is because the number of boomers aging will increase faster than the total annual Medicare revenues. As Boomers age in larger numbers, when the denominator (seniors needing care) increases faster than the numerator (revenue received by the fund), it means a smaller Medicare reimbursement per person to the companies receiving the reimbursements. That is, the per-unit rate at which reimbursements are paid may increase marginally or not at all, or may even decrease. Therefore, the argument that health care investing in such companies benefits from an increasing demand fails to recognize the problem that the Medicare HI fund that pays for that demand may not have enough money to keep up (12% funding gap).
3) Next, factor in that beginning in 2030 the CBO projects Social Security will receive income of only 71% of annual expenditures for the combined OASDI funds. Also consider that the present cumulative debt pertaining to the Federal Operating budget is nearly $20 trillion. (To be addressed later in a future article in this series regarding the projection for the operating debt).
4) There is a practical limit - never mind political limit - to which Medicare and Social Security taxes (and income taxes, for that matter) cannot be raised any higher to provide greater revenues. Additionally, given the Federal operating deficit, there are limits regarding how much of the annual Federal General budget can be redirected to subsidize the Medicare and Social Security expenditures. Nor can this be simply resolved by more Federal borrowing (all of which debt will be addressed in the next article in this series).
1) The HI Medicare fund, which pays hospital and nursing home costs, will be depleted by 2029. Once the fund balance is depleted, projected revenue inflows will be only 88% of expenditures for the HI fund - a 12% funding gap.
2) After asset depletion in 2029, no provision exists to use general revenues or any other means to cover the HI deficit.
3) "If current laws governing Social Security remain in effect, the OASI trust fund [which pays social security (other than disability) to most beneficiaries] will be exhausted in 2030, CBO estimates. In 2031, therefore, benefits would need to be reduced by 31 percent from scheduled amounts if outlays were limited to revenues credited to the trust fund."
4) "Under current law, the DI trust fund [which funds disability payments] will be exhausted sooner—in fiscal year 2022, according to CBO’s projections. If the program’s outlays were limited thereafter to revenues credited to the trust fund and if the Social Security Administration reduced DI benefits accordingly, payments to beneficiaries in fiscal year 2023 would be 20 percent less than the amounts scheduled under current law, CBO projects."
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