Economy Boosts Social Security, Medicare Life

The booming economy is generating huge tax revenues that will extend the life of the Social Security fund another three years until 2037 and give Medicare a big eight-year boost until 2023, federal officials reported Thursday.

“Americans will live longer and grow richer than previously thought,” Treasury Secretary Lawrence Summers said at a news conference.

The unexpectedly rosy projections by the two funds’ trustees could transform the debate on the future of Social Security and Medicare, just as the longest business expansion in American history has wiped out the government’s annual budget deficits and promised surpluses for years to come.

In 1996, for example, Medicare’s hospital fund was projected to go broke in just five years. Now it has a 23-year life expectancy--the biggest cushion in a quarter-century. The improvements in the financial outlook over the last five years for Medicare and Social Security “astound us,” the two public trustees, Stephen G. Kellison and Marilyn Moon, said in their section of the annual report.

Drug Benefits vs. Investments

The political effect of Thursday’s forecast is likely to be mixed. The movement toward allowing workers to keep some of their Social Security taxes and invest the money in personal accounts probably will be weakened because the date for Social Security insolvency is receding.

On Medicare, however, the unexpected good news may increase pressure on Congress to take advantage of the fund’s solvency to provide a prescription drug benefit for the first time to Medicare beneficiaries.

President Clinton wants a universal drug benefit, available on a voluntary basis to all 40 million Medicare beneficiaries. Congressional Republicans contend that most people 65 and older already have some form of insurance coverage for drugs. They say that any new benefit should be granted only to poor people.

The Medicare fund has enjoyed a double financial windfall: more tax revenues from the economic surge and reduced spending. Outlays have declined because of spending restrictions imposed by Congress and because of an aggressive drive by the government against fraud by health care providers. “We have changed the behavior of the [health care] industry,” Health and Human Services Secretary Donna Shalala said at the news conference.

Despite Thursday’s optimistic report, a basic demographic problem still confronts the nation: how to pay for the retirement and health care costs of the 76 million Americans born in the years 1946 through 1964, the biggest generation in U.S. history. The oldest of the baby boomers will become eligible for Medicare in 11 years at age 65, and they can draw full Social Security retirement payments in 12 years at age 66.

The Social Security trust fund depends on payroll taxes from workers and their employers. The fund is now projected to run out of money in the year 2037, compared with a projection of 2034 in last year’s report. When that happens, payroll tax revenues will be large enough to pay just 72% of the benefits promised under current law. Between now and then, the potential 28% gap must be filled by raising revenues, cutting benefits or a combination of both.

Clinton contends that the program is in good shape and does not need any major changes--like the GOP proposal for individual retirement accounts managed by individual taxpayers. Instead, he wants to use future general fund budget surpluses to fill the funding gap.

Republicans are skeptical. Thursday’s news “is bittersweet because, while the short term outlook has improved a little, the long-term outlook is still the same: Social Security is in serious trouble,” said Rep. Bill Archer (R-Texas), chairman of the House Ways and Means Committee. The president’s plan “wouldn’t help at all,” and “we should work on a real plan that saves Social Security and creates personal savings accounts for all Americans,” Archer said.

The issue of personal accounts carved out of Social Security taxes could erupt during the presidential campaign. Vice President Al Gore, the likely Democratic nominee, opposes the idea, while Texas Gov. George W. Bush, the expected Republican nominee, wants to open accounts for all younger workers.

Chip Kahn, president of the Health Insurance Assn. of America, which represents insurers, said that the trustees’ report will take away some of the impetus for overhauling Social Security and Medicare.

“It will make reform harder because the main argument of the advocates [for reform] was that reform was to help the retirement of the baby boom generation,” Kahn said. With the fund projected to remain solvent at least halfway through the baby boom’s retirement, the pressure is off, Kahn said.

However, political pressure for adding coverage of prescription drugs to the health care program continues to grow regardless of whether there is an overhaul of the entire program.

Both parties want to spend money to help seniors pay for drugs. “It’s not whether there will be a drug benefit but how,” said Kahn. He added, however, that prospects for coverage are dim this year because “there’s a pretty deep chasm” between Democrats and Republicans on the issue.

Predictably, those differences flavored the immediate response to the report on Capitol Hill.

“There is no excuse now for inaction on prescription drugs,” said Rep. Charles B. Rangel of New York, the ranking Democrat on the House Ways and Means Committee. “Even if we cannot agree at the moment on how to deal with Medicare reform overall, we must make this vital benefit available to our seniors immediately.”

But the GOP argues that drugs must be part of a general overhaul of Medicare. “Seniors cannot survive on prescription drugs alone. They need doctors, hospitals and home health care too, which is why our plan will incorporate a drug benefit into a stronger and more modern Medicare system,” said Rep. William M. Thomas (R-Bakersfield), chairman of the health subcommittee of Ways and Means.

‘A High-Class Problem’

Medicare has two parts. Its hospital trust fund, Part A, is financed by payroll taxes on workers and employers, and the expected insolvency date of 2023 announced Thursday is a significant improvement over last year’s projection of 2015. Part B, which pays doctors’ bills, is financed by beneficiaries’ contributions and general tax revenues. The growth rate has slowed in recent years but is still expanding faster than the overall economy.

Although both Medicare and Social Security pose financial challenges for voters and their elected officials, the dilemma is one unique to a society in which masses of people grow old in good health.

“Now let’s face it, this is a high-class problem,” Clinton said Thursday in a speech at a senior citizens’ center in the New York borough of Queens. “This is the kind of problem we have because we’re living longer and better lives, because of the miracles of modern medicine, because of the miracles of basic public health, because we’re taking better care of ourselves, and that’s all very, very good.”