Economy Boosts Prospects of Medicare, Social Security

Social Security and Medicare, bolstered by a booming economy, will enjoy an unexpected extension of their financial solvency, government trustees reported Monday.

But President Bush, pushing hard for partial privatization of Social Security, insisted that both programs are in trouble for the long haul and need major reforms.

“Reform must include allowing younger workers the option to take some of their own money and put it in the private markets, under safe conditions,” the president told a meeting of the Hispanic Chamber of Commerce at the White House.

The rosy financial projections for Social Security and Medicare are prompted by a flood of payroll tax revenues for both of the nation’s giant social welfare programs. In addition, experts say, Medicare has been successful in holding down the growth in spending.

As a result, Social Security’s retirement trust fund will not run out of money until 2038, a year later than was predicted in last year’s annual report by the trustees. And the solvency of Medicare’s hospital fund will be extended until 2029, four years beyond the previous forecast, according to the report issued Monday.

Despite the short-term good news, Bush and the Republican majorities in Congress want to make significant alterations in both programs, including the creation of personal investment accounts using a portion of Social Security payroll taxes. This concept--called privatization--would give workers a better return on their money than they receive through Social Security, according to the president and other supporters of the idea.

For Medicare, they want a redesign of the program, adding prescription drugs and encouraging more retirees to join health maintenance organizations and other private insurance alternatives to the current Medicare system.

“We have only so many years to get the systems back on track,” the president said. “It’s time to quit the posturing and time to reform the systems. And I’m prepared to spend the political capital, along with both Republicans and Democrats, to do so.”

Democrats, hoping to recapture the political momentum from the White House, are trying to link the debate over Medicare and Social Security’s future with the current fight over the president’s tax plan. They argue that there isn’t enough money to protect Medicare and Social Security and afford the $1.6-trillion tax cut advocated by the president.

“Today’s news makes it clear that we are on the right path,” said Sen. Tom Daschle (D-S.D.), the Senate minority leader. “We should build on the progress we’ve made and take the necessary steps to ensure that every penny of the Medicare surplus is preserved for its intended purpose. Unfortunately, President Bush’s budget does the exact opposite. He takes money that is already promised to Medicare--the $526-billion Medicare Trust Fund surplus--and uses it to support his tax cut and spending proposals.”

Echoing that theme, Rep. Charles B. Rangel of New York, the ranking Democrat on the House Ways and Means Committee, said, “President Clinton and congressional Democrats kept the Republicans from enacting irresponsible tax cuts, and Social Security’s solvency has steadily improved. If we enact vast tax cuts before a budget is in place, then we risk not having the resources there for Social Security when it needs them the most.”

The Bush administration, by contrast, insists that it can safeguard Social Security and Medicare and still cut taxes. Failing to enact reforms in the two programs would be disastrous, Treasury Secretary Paul H. O’Neill, one of the three Cabinet members serving as trustees for Social Security and Medicare, told a news conference.

The consequences of the new report are similar to “being in the middle of an auto accident before you hit something,” O’Neill said. “You know you’re going to, and you wish you could do something about it, and most of the time, thankfully, you can.”

Currently, Social Security has 45 million beneficiaries: retirees, the spouses and survivors of retirees, disabled people, and their families. Medicare helps pay the hospital and doctor bills for 40 million people: those over 65 and the disabled of all ages.

The baby boom generation--Americans born from 1946 through 1964--is the largest cohort in American history, accounting for most of the at least 75 million people expected to be drawing Medicare and Social Security benefits by 2030.

The long-range worry is whether Medicare and Social Security will be available to the baby boomers without major reductions in benefits, or major tax increases on the workers who pay for the programs.

Social Security now enjoys a surplus, with more money collected in taxes than is paid out in benefits. Workers and their employers each pay 6.2% in taxes on the first $80,400 a year in wages. The surplus tax money is invested in Treasury securities.

In 2016, actual taxes collected will be less than benefits, and the government will begin liquidating the portfolio of securities to help make benefit payments. The trust fund and its entire surplus of securities will be exhausted in 2038, according to government estimates. In that year, Social Security will collect enough in taxes to pay 72% of the benefits promised under current law. Closing the gap--finding the money for the remaining 28%--is the challenge for Bush and the current Congress and their successors.

Medicare’s financial problems are more formidable, because the advances of technology and new drug discoveries will increase longevity and create new spending categories. The hospital trust fund, now scheduled to last until 2029, is financed by payroll taxes. But Part B, which covers doctor bills and home health care costs, is largely financed by general tax revenues, and it is rising rapidly.

New estimates about medical inflation show a huge potential gap between future Medicare revenues and Medicare spending, Health and Human Services Secretary Tommy G. Thompson told the news conference.