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What to look for in Social Security, Medicare forecasts

With Congress and President Barack Obama focused on ways to reduce the extraordinarily large deficits and debt, Friday’s release of the annual reports of the Social Security and Medicare trustees is a timely political event.

With Congress and President Barack Obama focused on ways to reduce the extraordinarily large deficits and debt, Friday’s release of the annual reports of the Social Security and Medicare trustees is a timely political event.

The trustees’ job is to examine the financing of the nation’s two massive spending programs for older people and the disabled.

The trustees rely on the government’s actuaries — the people who actually crunch the numbers on mortality, immigration, employment, and other factors to calculate the programs’ solvency over the next 75 years.

Social Security and Medicare accounted for 35 percent of all federal spending in fiscal year 2010, an amount that will grow to 40 percent of spending by 2021 and more after that, as the over 65 segment of the population grows.

The pressing questions are: Will these programs be able to pay a comparable level of benefits to today’s workers as they do to today's retirees? And what will the tax burden be on workers in future decades?

Here are four significant items to look for in Friday’s trustees' reports:

  • What is the trustees’ forecast for the income and outgo of the Social Security system?

What Social Security data showed in the fourth quarter of 2010 is that there weren’t enough workers paying into Social Security to cover the benefits that are being paid out to today’s retirees. In the fourth quarter of 2010, $139.3 billion in taxes were paid, but $177.6 billion in benefits were sent out.

Will such shortfalls now become normal and, if so, by how much would that advance the date at which Social Security needs to cash in its bonds and draw on the rest of federal revenues?

Spending on other federal programs will need “to be reduced to make way for the payments that we're going to have to make on those bonds,” Senate Budget Committee Chairman Kent Conrad explained last February.

  • A related question: How do the trustees think the American economy will perform in the years ahead?

And since it’s today’s workers who pay for most of the benefits of today’s retirees, the most important question is: will unemployment return to the low levels of 1995-2007, or will it stay at today’s disturbingly high level?

Last year the trustees estimated that unemployment rate will remain at 9.5 percent in 2011 and then decline slowly and reach 5.5 percent by 2018.

“There hasn’t been any significant legislation affecting Social Security or Medicare enacted since the last trustees' reports, so changes in the projections will simply have to do with fine tuning of the economic and the other assumptions underlying the projections,” said Paul Van de Water, a former official at the Congressional Budget Office who is now an analyst at the Center on Budget and Policy Priorities, a liberal think tank.

“The thing to look for is what sorts of adjustments the trustees have made. We don’t know for sure, but we think there’s a chance they might have a somewhat slower recovery projected over the next few years,” Van de Water said.

  • Has there been an above average increase in the number of people on disability? If so, why is it occurring?

Applications for disability insurance in 2009 were nearly 260,000 above the 2008 level. The trustees said in their report last year that this was “due to the impact of the economic slowdown.”

From April of 2010 to April of 2011, the number of people getting disability payments went from 7.9 million to 8.3 million, a 5 percent increase.

The trustees warned last year that “the DI (Disability Insurance) Trust Fund is projected to become exhausted in 2018, so some action will be needed in the next few years.”

There are two Social Security funds: the Disability Insurance fund and the Old-Age and Survivors Insurance (OASI) fund. Janet Barr, the chairperson of the Social Insurance Committee at the American Academy of Actuaries said “the thinking is that some provision will be made to allow the OASI fund to lend money to the DI fund. They wouldn’t allow it to just go negative and stop paying benefits.”

  • Last year, the projected insolvency date for Medicare’s hospital insurance fund was 2029. Has that changed?

And how do the trustees now assess the success of last year’s health care overhaul in cutting Medicare’s costs?

Last year’s Medicare trustees report had both an upbeat and a wary assessment of the effect on Medicare of the reform that Obama signed into law last year.

The finances of the Medicare hospital insurance (HI) fund were “substantially improved by the lower expenditures and additional tax revenues” instituted by the health care law, the trustees said last year. “These changes are estimated to postpone the exhaustion of HI trust fund assets from 2017 under the prior law to 2029.”

But they also warned readers to not rely too much on the projections in their report, partly because forecasting rules require them to assume that cuts in Medicare payments to doctors — "30 percent over the next 3 years" — would actually occur. But they said there was "virtual certainty" that Congress would not allow those cuts to take place.

The trustees also said their projected date for Medicare insolvency, 2029, depended on “very favorable financial outcomes” that would occur only if doctors and hospitals could hit productivity targets in the health care reform law, and if that productivity “can be sustained in the long range.” They said that might not happen.