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Forecast: Social Security to be depleted in 2040

/ Source: The Associated Press

The trustees for the government’s two biggest benefit programs said Monday that the trust fund for Social Security will be depleted in 2040, a year earlier than expected, while Medicare will exhaust its trust fund just 12 years from now.

The annual report showed deterioration in the financial condition of both programs although the problems in Medicare were depicted as far more serious because of the skyrocketing costs for health care.

A year ago, the depletion of the Social Security trust fund had been projected to occur in 2041, one year later than the current estimate, and the Medicare hospital insurance fund had been forecast to last until 2020, two years longer than the current estimate.

The trustees, who include the head of the Social Security Administration and three members of President Bush’s Cabinet, painted a sober assessment of the health of the two programs in advance of the looming retirements of 78 million baby boomers.

They stated that the projected long-term growth rates for both Social Security and Medicare are not “sustainable under current financing arrangements.”

The trust funds contain the equivalent of government IOUs. To raise the actual cash to meet obligations, the government must borrow more money from the public by issuing marketable Treasury securities, raise taxes or cut spending in other programs.

Bush tried last year to overhaul Social Security with the introduction of private investment accounts for younger workers but the idea went nowhere in Congress. Democrats attacked the Bush program as a hidden effort to cut future benefits.

In this year’s State of the Union address, Bush asked Congress to create a bipartisan commission to study entitlement reform. But even this modest proposal has not generated much interest, in part because lawmakers do not want to address entitlement reforms in a congressional election year.

Treasury Secretary John Snow, the chairman of the trustees group, said the new report depicted “a looming fiscal crisis as the baby boom generation moves into retirement” and he urged Congress to move forward.

“The serious concerns raised by the trustees’ reports demand the attention of America’s policy-makers and the public,” Snow said.

But Democrats charged that the administration was using the trustees reports to try to create an air of crisis to make radical changes to the two benefit programs.

“There is no crisis,” said Rep. Pete Stark, D-Calif. “There remains plenty of time to mend rather than end Medicare.”

While the depletion of the reserves built up over past years is projected to occur in just 12 years for Medicare and 34 years for Social Security, both programs will face financing issues much sooner at the point that the amount paid out each year exceeds the amount the government collects to fund them.

For Medicare, that occurred for the year of 2004. However, the program is projected to be in the black again this year before crossing over to paying out more than it takes in permanently in 2006 and the years following that.

For Social Security, the point at which the program will pay out more in benefits than it takes in will occur in 2017, the trustees projected, the same as in last year’s report.

The one-year faster depletion of trust funds in the case of Social Security occurred because the government estimated a slightly lower average of 2.9 percent rather than 3 percent for the inflation-adjusted return for the trust fund’s government bonds.

For Medicare, the faster exhaustion of the trust fund occurred because of rising prices for hospital care and greater utilization by sick people of the program.

The trustees estimated that in 2040 when the Social Security trust fund is depleted, it will be able to pay 74 percent of benefits from the taxes imposed on current workers.

The trustees estimated that the monthly Part B premium that Medicare beneficiaries must pay to cover insurance for doctor visits will have to rise by around 11 percent next year to $98.20 after an increase this year of 12 percent.

Sens. Edward Kennedy, D-Mass., and Debbie Stabenow, D-Mich., said in a statement that the projected increase for next year, if it comes about, would mark the fourth double-digit advance in Medicare premiums.

They said they would introduce legislation to cap future increases to the amount the Consumer Price Index rises in a given year. Last year, consumer prices rose 3.4 percent.

The trustees report reduced the estimate for the cost of the new drug prescription benefit in Medicare, which went into effect this year, by around 20 percent, attributing part of this reduction to the fact that people are signing up for less costly drug plans.

Democratic critics said the funding shortfalls for Social Security and Medicare should be viewed in the context of Bush’s drive to make the tax cuts of his first term permanent.

Sen. Jack Reed, D-R.I., said that if Congress approved Bush’s request to make his tax cuts permanent and enacted a permanent fix for the alternative minimum tax, which was designed to tax the wealthy but is falling on more middle-class tax payers, that would represent a cumulative revenue shortfall equal to 2 percent of the total economy over a 75-year period.

That is three times the shortfall estimated by the trustees for Social Security over the same period, Reed said.