Trustees Revise Fiscal Forecasts for Social Security and Medicare

The overseers of the government’s two biggest domestic programs estimated Wednesday that Social Security was one year closer to financial crisis than they had figured a year ago, but that Medicare was one year further away.

Using what was described as the likeliest economic and demographic assumptions, the annual report of the programs’ trustees says Social Security’s substantial annual surpluses will turn into deficits in 2017 because of the number of baby boomers who will be drawing benefits from the program rather than putting their payroll taxes into it.

If no action is taken in the meantime, the trustees said, the reserves in the Social Security trust fund will be used up by 2041. That would leave only the annual payroll taxes as a source of benefit payments, which would have to be cut by 26% for all recipients, they said.

Medicare, the government’s healthcare program for the elderly, is already spending more annually than it is collecting in payroll taxes, the trustees said. Its trust fund is on course to run out of money in 2020 -- a year later than last year’s report estimated, thanks to higher tax revenue and slightly lower spending last year. Unlike Social Security, Medicare is already spending more this year than it will collect from its 2.9% payroll tax.

Unlike previous annual reports, this one immediately became the center of political attention, because President Bush has placed Social Security at the top of his second-term domestic agenda.

Most experts described as statistically insignificant the trustees’ revised estimations of 2017, rather than 2018, as the year when Social Security would begin running annual deficits and 2041, rather than 2042, as the time the trust fund would run out of money.

“The further out in time you project, the more speculative the numbers become,” said Kenneth Apfel, the Social Security commissioner under President Clinton.

Nevertheless, the report provided fodder for advocates and detractors alike of Bush’s proposal for private Social Security accounts.

Social Security, said Treasury Secretary John W. Snow, one of its six trustees, is on an “unsustainable course.... The report underscores the fact that we have to do something.”

The answer, Snow said, is to leave benefits unchanged for people born before 1950 but offer younger workers investment accounts with potential stock market profits to offset expected benefit cuts -- all without raising the payroll tax rate.

On the other side, Rep. Nancy Pelosi (D-San Francisco), the House minority leader, said the report “flatly contradicts Republican efforts to manufacture a ‘crisis’ in Social Security to justify a privatization plan that is unaffordable, unnecessary and unwise.”

“Democrats recognize that Social Security does face a challenge down the road,” Pelosi said in a statement, “and we are committed to ensuring that American families receive the secure retirement they have earned.”

Rep. Bill Thomas (R-Bakersfield), chairman of the House Ways and Means Committee, which has jurisdiction over both Social Security and Medicare, issued a statement that reached a conclusion not far from Pelosi’s.

After praising Bush for making Social Security his top second-term priority -- but without mentioning private accounts -- Thomas said, “Action is needed sooner rather than later if we are to avoid a crisis.”

The trustees estimated that the Social Security trust fund, which now holds about $1.5 trillion in special Treasury securities, would continue to grow until 2017, to about $5 trillion.

Then the trust fund would be drawn down to pay benefits of increasing numbers of retired baby boomers, the trustees said. In the absence of changes in the program, the trust fund will be exhausted in 2041, the report says.

Over the next 75 years, Social Security revenue will fall $4 trillion short, in today’s dollars, of being able to pay benefits now promised by law. That is $300 billion more than estimated last year -- largely because the new report’s 75-year time span omits 2004, a year with a large surplus, and includes 2079, a year when spending is projected to outrun revenue by a considerable amount.

Closing the gap between expected revenue and promised payments would require benefit cuts, tax increases or a combination of the two. An immediate increase in the payroll tax of 1.92 percentage points (0.96 each for employer and employee) would do the job, as would a benefit cut of about 12.8%.

Bush has ruled out an increase in the payroll tax rate, now 12.4%, though he has remained open to an increase in the amount in annual wages, now capped at $90,000, that the tax is applied to.

A variety of benefit cuts have been proposed, including a change in the formula for computing benefits and a delay in the age at which workers could begin to draw Social Security.

Jason Furman, a senior fellow at the nonpartisan Center on Budget and Policy Priorities, said Bush’s private accounts would significantly worsen Social Security’s outlook by diverting payroll tax revenue from the trust fund. He estimated that if the private accounts were established, Social Security would start running annual deficits in 2011 instead of 2017 and the trust fund’s balance would go to zero in 2030 instead of 2041.