Benefits Outlook Is Mixed Bag

Times Staff Writer

The long-term financial outlook for Social Security is somewhat brighter than a year ago, but increased unemployment and rising health-care costs have taken a toll on the Medicare program, government trustees reported Monday.

With baby boomers set to begin retiring in eight years, the trustees predicted that the Medicare trust fund would run dry in 2026, four years earlier than last year's projection. They said the Social Security trust funds would not be exhausted until 2042, one year later than the previous prognosis.

Bush administration officials used the new reports to renew their calls for the introduction of private investment accounts to Social Security and managed-care plans to Medicare.

"As we continue to work together to keep Social Security strong and reliable, we must offer younger workers a chance to invest in retirement accounts that they will control and they will own," President Bush said in a statement.

But Barbara B. Kennelly, president and chief executive of the National Committee to Preserve Social Security and Medicare, noted that "while the Nasdaq has lost 74% of its value in the last three years, Social Security remains strong and stable."

The six-member board of trustees that oversees Social Security and Medicare reports to Congress once a year on the long-term financial prospects of the two huge social-insurance programs. The new numbers are generally followed by much rhetorical hand-wringing and little political action.

Monday's release of the 2003 reports, coming as Congress begins debating administration budget proposals expected to produce federal deficits of more than $300 billion, was no different.

"The chances of anything happening on Social Security are flat-out zero in the near term" because of growing federal deficits, which could also complicate efforts to add a prescription-drug benefit to Medicare, said Henry J. Aaron, a senior fellow at the nonpartisan Brookings Institution.

While Monday's report confirms that Social Security is not sustainable over the long term, there is no short-term crisis, said Commissioner Jo Anne Barnhart.

"I want to assure those already receiving Social Security benefits -- as well as those who are close to retirement -- that your benefits are secure," she said. "But doing nothing will have serious consequences for our children and grandchildren."

Last year 46 million Americans received $454 billion in Social Security benefits, while the government spent $266 billion on health-care payments for 41 million Medicare beneficiaries.

The fundamental problem facing both programs, which are financed by payroll taxes, is demographic. Falling birthrates have reduced the pool of workers paying Social Security and Medicare taxes, yet the number of retirees drawing on the tax revenue will increase significantly as 78 million baby boomers begin reaching age 65 in 2011.

In 1965, for example, there were four workers for every Social Security recipient. That figure has now shrunk to 3.3 workers for every recipient, and in 40 years there will be only two workers per beneficiary.

The trust funds of both programs suffer when unemployment increases, leaving fewer workers and employers to pay Social Security and Medicare taxes. The Medicare program is also subject to the twists of medical costs, which now are rising annually at double-digit rates.

The Medicare-taxable payroll last year was 4% lower than estimated, while hospital expenses were 2% higher than projected. More beneficiaries spent time in the hospital and their illnesses were more complicated and expensive, officials said.

Rising health-care costs and the aging of the population will also affect federal spending overall. Medicare spending is projected to increase from 2.6% of the nation's annual economic output now to 9.3% in 2077. Social Security benefits, now 4.4% of economic output, would reach 7%, also by 2077, under current tax and benefit policies.

Both programs are pay-as-you-go, and when expenditures exceed tax revenue, they have to dip into their trust funds.

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