Medicare and Social Security: Weighing Solvency

Medicare and Social Security: Weighing Solvency Cori E. Uccello, MAAA, FSA, FCA, MPP Senior Health Fellow, Ron Gebhardtsbauer, MAAA, FSA, FCA Senior Pension Fellow, April 1, 2005 Noon 1:00 pm B-339 Rayburn House Office Building Medicare/Social Security briefing 1

Seniors Are Living Longer 30 25 20 15 Life expectancies at age 65 (years) 19 17 17 13 19 22 21 24 10 5 0 1960 2000 2040 2080 Men Women Source: Cohort life expectancies from the 2005 Social Security Trustees Report Medicare/Social Security briefing 2

Birth Rates Have Declined 6 Average number of children born to a woman in her lifetime 5 4 3.6 3 2 2.1 2.0 2.0 1 0 1960 2000 2040 2080 Source: 2005 Social Security Trustees Report Medicare/Social Security briefing 3

Seniors Are a Growing Share of the Population 100% 80% 60% 40% 9% 12% 52% 59% 21% 23% 55% 54% 20% 0% 38% 29% 24% 23% 1960 2000 2040 2080 Under 20 20-64 65+ Source: 2005 Social Security Trustees Report Medicare/Social Security briefing 4

Fewer Workers To Support Each Retiree 10 Population aged 20-64 divided by population aged 65+ 8 6 5.8 4.8 4 2 2.7 2.3 0 1960 2000 2040 2080 Source: 2005 Social Security Trustees Report Medicare/Social Security briefing 5

Poverty Rates Among Seniors Have Declined Dramatically 40% 35% 30% 25% 20% 10% 15% 11% 10% 10% 0% 1959 1969 1979 1989 1999 2003 Source: US Census Bureau s Current Population Survey. Medicare/Social Security briefing 6

Medicare Medicare/Social Security briefing 7

Medicare Trust Fund Basics Benefits Hospital Insurance (HI) Inpatient hospital care Supplementary Medical Insurance (SMI) Physician and outpatient care; Part D benefit Financing Payroll taxes Beneficiary premiums (~25%) and general tax revenues (~75%) Medicare/Social Security briefing 8

HI Costs Already Exceed Non-Interest Income 14% HI non-interest income and costs as a % of taxable payroll 12% 10% Cost rate 8% 6% HI Deficit 4% 2% 0% Amount of deficit that would be covered by interest earnings and asset redemptions. Income rate 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2005 Medicare Trustees Report Medicare/Social Security briefing 9

Key Dates For HI Trust Fund First year outgo exceeds income Excluding interest income 2004 Including interest income 2012 Year trust fund assets are depleted=2020 Trust fund depletion date (2020) is one year later than projected last year, due to: Slightly lower hospital expenditures Slightly higher payroll taxes Medicare/Social Security briefing 10

Bottom Line for HI Trust Fund HI tax revenues will cover 79% of benefits in 2020, when trust fund assets are depleted HI deficit over the next 75 years = $8.8 trillion Eliminating 75-year deficit would require: Immediate 107% increase in payroll taxes, or Immediate 48% reduction in benefits, or Some combination Medicare/Social Security briefing 11

SMI Trust Fund The SMI Trust Fund, which includes new Rx benefit, is expected to remain solvent, but only because its financing is reset each year to meet projected future costs. Projected increases in SMI expenditures will require increases in beneficiary premiums and general revenue contributions over time. 2004 Part B monthly premium: $66.60 2005 Part B monthly premium: $78.20 2006 Part B monthly premium (projected): $87.70 SMI expenditures are projected to increase faster than HI expenditures. Therefore, general revenues will finance increasing share of overall Medicare expenditures. Medicare/Social Security briefing 12

Total Medicare Expenditures and Income 14% Percent of GDP 12% Total Expenditures 10% 8% Total Non-interest Income HI Deficit 6% 4% 2% State transfers General Revenue Premiums 0% Tax on Benefits Payroll Taxes 1969 1979 1989 1999 2009 2019 2029 2039 2049 2059 2069 2079 Source: 2005 Medicare Trustees Report Medicare/Social Security briefing 13

Limit on General Revenue Financing If for 2 consecutive Trustees Reports, general funding sources account for more than 45% of Medicare spending within the next 7 years, the President is required to recommend ways to reduce this share. President s legislative proposal must come within 15 days of next budget submission. Congress required to consider the legislation on an expedited basis. Medicare Trustees Report estimates that the 45% threshold will be reached in 2012, thereby triggering the provision in 2007. President s legislative proposal would be required in 2008. Medicare/Social Security briefing 14

Rising Costs Are Key Challenge to Medicare s Long-Term Sustainability 16% Expenditures as a % of GDP 14% 12% 10% 8% 6% 4% 2% 0% 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2005 Medicare Trustees Report Medicare/Social Security briefing 15

Social Security Medicare/Social Security briefing 16

Social Security Benefits Replacement rates maintained Initial benefits increase by average wages each year Benefits being paid increase by CPI each year Payable for life No matter how long you live No matter how bad the markets Disability and Survivor benefits (1/3 rd of total benefits) Spousal benefits (at least 50% of worker s benefit) Valuable for traditional family Medicare/Social Security briefing 17

Social Security Replacement Ratios at Normal Retirement Age (and at Disability) 100% 90% 80% Percent of Earnings Replaced 70% 60% 50% 40% 30% 20% 74% 52% 45% 41% 38% 34% 31% 28% 26% 23% 10% 0% $10,000 $30,000 $50,000 $70,000 $90,000 Earnings Just Before Retirement in 2005 See History of Provisions at www.ssa.gov/oact/hop. Past wages based on National Average Wage Index These percentages decrease by about 2 to 3 percentage points over the next 10 years, per Table VI.F10 in 2005 rpt. Medicare/Social Security briefing 18

Social Security Benefits at Normal Retirement Age (and at Disability) $25,000 Estimated Benefit $20,000 $15,000 $10,000 $7,388 $10,400 $13,414 $16,423 $19,169 $20,474 $21,587 $22,632 $23,482 $23,482 $5,000 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 Earnings Just Before Retirement in 2005 This and prior graph show the primary goals of Social Security: (1) Socially Adequate benefits (progressive benefits that are more important to lower wage earners) (2) Individually Equitable benefits (important to higher wage earners - the more contributed, the more received). Medicare/Social Security briefing 19

Social Security Benefits Paid in Calendar Year 2004 Retiree Benefits 66% $327B $88 B $78 B Survivor Benefits 18% Disability Benefits 16% Total Benefits Paid = $493 Billion Source: 2005 Trustees Report, Table III.A5 Medicare/Social Security briefing 20

Social Security Trust Fund Ratios (Beginning of Year Assets as a % of Expenditures) 700% 600% 500% 400% 300% 200% Low Cost Intermediate High Cost 100% 0% 2030 2041 2052 per CBO 1960 1980 2000 2020 2040 2060 Calendar Year The Social Security Trust Funds are projected to be exhausted in 2041 using the Intermediate Assumptions. The assumptions are reasonable in the aggregate per GAO/PWC report & individually reasonable per SS Chief Actuary. 2005 SSA Trustees Report: Table IV.B3. Historical Trust Fund Ratios are from VI.A4. Even on the low cost assumptions, Social Security does not meet their Sustainability Test (trust fund ratios stable or increasing around 75th year). Medicare/Social Security briefing 21

Assumptions Demographic Fertility Mortality Immigration Economic Interest Rates on Treasury Bonds Productivity Wage Increases Price Inflation Labor Force Participation and Unemployment Rates Medicare/Social Security briefing 22

20 Social Security Income & Outgo Intermediate Assumptions Actual Estimates 17.5 Greater Life Spans 19.1 % of taxable payroll 15 10 5 Outgo Income Baby Boom 2017 SSA 2020 CBO 74% of outgo in 2041 PV = $4.0 Trillion 68% of outgo in 2080 $7.1 Trillion 13.4 0 Calendar Year 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2005 Trustees Report Table IV.B1. Using low (high) cost assumptions, the 2080 outgo is 14% (27%), and the 2017 date is 2022 (2013). It's 2027, if interest is included, per Summary. The 75-yr actuarial balance = -1.92% (1.0% per CBO), -4.96, & 0.38% of taxable payroll for the intermediate, high, & low cost assumptions, per Table IV.B4, and - 3.5% (1.2% of future GDP) without the 75-yr limit per p. 59 (although we could increase SSNRA some century). Table IV.B6&7, UTL = $12.0 T, so future workers pay for themselves & $0.9 T of UTL Medicare/Social Security briefing 23

Reasons to Reform Social Security Sooner Rather Than Later More options available to us More people included in reform Benefit cuts & tax increases for future cohorts can be less, if desired We can phase reforms in We can plan ahead for the changes We can restore faith in SS and government Delaying decision could force the solution to rely more on raising taxes Medicare/Social Security briefing 24

Conclusion Medicare/Social Security briefing 25

20% 15% 10% Total Costs of Social Security, Medicare, & Medicaid (as a percent of GDP) 5.6% Medicaid 8.5% total Medicare A + B Medicare D 13.8% 1.5% 5% 2.7% 4.3% in 2005 Social Security 6.4% in 2080 0% 2000 2010 2020 2030 2040 2050 2060 2070 2080 Calendar Year Sources: 2005 OASDHI Table VI.F4; SMI from Medicare report Tables III.C14 & 20; and Medicaid from CBO's 10/2000 and 6/14/2002 reports. Today, these programs are half of non-interest government expenses. Their total costs more than triple to 26% (Medicare quintuples, surpassing SS by 2024). If estimates are accurate, they will exceed 20% of the economy, thus absorbing all federal taxes, unless taxes increase or government programs shrink. Medicare/Social Security briefing 26