Social Security, Medicare Cash Crunch Grows

The government will report Wednesday that the Medicare and Social Security trust funds will each run out of money a year earlier than expected, officials said Monday.

The Medicare trust fund, which pays the hospital bills of the elderly, will go bankrupt in 2001 if steps are not taken to shore it up, the trustees will report.

“Hospital usage is way up,” reflecting the needs of the fast-growing 85-and-over population, one official said. Last year’s report predicted that the fund would be exhausted in 2002.

The Social Security retirement trust fund will be unable to pay full benefits in the year 2029, instead of 2030 as predicted last year, according to the report.

The advanced date for Medicare bankruptcy is likely to reignite the partisan debate over that program. As they have in the past, Republicans almost certainly will warn that benefits for seniors will be endangered unless significant reforms are made. Democrats are likely to counter that the giant entitlement program is basically healthy and that only minor changes are needed.

*

Staving off bankruptcy for the short run probably can be achieved by making beneficiaries pay a bit more and giving doctors and hospitals a bit less, most experts agreed. But the long-range problem will require massive funds to give the 76 million baby boomers the blessings of ever-improving--and ever more costly--medical technology. The other alternative would be a sharp cut in the level of benefits, giving future retirees a much less generous health program than that enjoyed by today’s beneficiaries.

The Republicans sought changes last year designed to slow the rate of growth from the current figure of 10% annually to a pace of 7.5%, trying to assure solvency for at least a decade. Those revisions would save $168 billion over six years, which compares to $128 billion in savings proposed by President Clinton.

“Nothing is going to happen this year--the real question is whether something is going to happen in 1997,” said Gail Wilensky, a former administrator of the Medicare program and a senior fellow at Project Hope.

“We need to do something to buy ourselves some time to face the enormous problem of what to do with the impending retirement of the baby boomers,” she said.

Told about the forthcoming report, Rep. Bill Thomas (R-Bakersfield), chairman of the health subcommittee of the House Ways and Means Committee, said the bitter, unresolved partisan debate means that “we have lost a year.” The report “should be enough to sober everybody up and we should sit down and get serious,” about making changes to shore up the system, he said.

Spending has grown $90 billion beyond expectations in just a year, with the potential shortfall by 2006 projected to reach nearly $500 billion, he said, citing Congressional Budget Office studies.

“Democrats said the change we proposed was way too much, but what the president proposed was way too little,” Thomas said. “At some point, we have got to begin seriously talking about attacking this problem.”

After the trustees issue their report on Wednesday, “I hope the president will make a proposal for a reasonable package of changes, not the old political stuff,” he said.

The White House has argued that sufficient short-term savings can come from trimming the growth in payments to doctors and hospitals. The GOP wants to do this and also to impose tougher controls on home health care spending. Republicans also want to adopt a more aggressive program of encouraging beneficiaries to move into health maintenance organizations and other forms of managed care.

Medicare, which covers persons 65 and over and the disabled, is financed by a payroll tax on salaries, 1.45% paid both by workers and employers. This payroll tax pays for the hospital trust fund, known as Part A of Medicare.

Medicare beneficiaries pay $42.50 a month for their coverage for doctor bills under Part B of Medicare. But this pays only 25% of the cost of Part B--the rest of the money comes from the treasury.

Today’s beneficiaries over their lifetime get about three times as much in benefits as the taxes and premiums that they paid into the Medicare system.

*

The crunch for Medicare will come in the next century, with the population drawing benefits soaring from the 32 million now enrolled in the program to 70 million by the year 2030. The first of the baby boomers, the 76 million Americans in the largest generation in the nation’s history, will become eligible for Medicare in the year 2011.

At that time, “we will have to ask ourselves whether it will make sense for the working middle class to support a full benefit package for wealthy seniors,” Wilensky said.

But the traditional advocates of Medicare emphasize that its political strength, like that of Social Security, is the universal nature of the benefit--everybody pays into the system and everybody collects benefits, with none of the stigma attached to programs for the poor.

The inescapable answer is more dollars for Medicare, said Gerald Shea, assistant to the president for government affairs at the AFL-CIO.

“You’ve got to put more money into the system,” he said. “Whatever you do on cost savings in the short run will not get you past the huge demographic wall of the baby boomers.”

Medicare costs are particularly hard to predict because changes in technology can prolong active and healthy life and also run up huge bills. For example, heart bypass surgery was not developed until 1967, two years after the creation of Medicare. Today, it is the largest single category of spending, accounting for about $5 billion of the annual outlays of $180 billion.

Social Security is a more manageable problem because actuaries can calculate expected benefits more precisely, knowing salaries and work histories. The first baby boomers become eligible for full benefits in 2012 (the retirement age, now 65, will be 66 for them). But the crunch will not come for another 17 years, because the trust fund is now accumulating major surpluses that will not be depleted until 2029, according to the report.

The surplus is building now because tax revenues from 140 million workers are coming in faster than benefits are being paid out. The current group of beneficiaries include many who were born in the Depression era, when birth rates were low.