Trustees: Medicare Funds Will Be Depleted By 2017

The Obama administration announced Tuesday that the Medicare program is running out of money faster than projected. Health and Human Services Secretary Kathleen Sebelius said that news should make lawmakers redouble their efforts on a full health system overhaul. On Capitol Hill, senators are struggling to come up with ways to pay for that overhaul.

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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Renee Montagne is in on assignment today. I'm Steve Inskeep.

Even in a time of trillion dollar bailouts, it can be hard to get your brain around the costs we have coming. President Obama's administration says the Medicare program is running out of money faster than expected. So is Social Security. Neither program is taking in money quickly enough to handle all the baby boomers heading their way. And in a moment, we'll get a diagnosis from David Wessel. We began with the plan to add even more expenses to overhaul health care for the rest of us.

NPR's Julie Rovner reports.

JULIE ROVNER: About the only person who was upbeat about health care yesterday was the president himself. Here's what he said at a photo op after meeting with a group of business leaders to talk about how they've managed to cut their worker's health care costs.

President BARACK OBAMA: We're doing some stuff on health care because I think the country is geared up. Businesses are geared up. Families are geared up to go ahead and start solving some of our extraordinary health care system problems.

ROVNER: Down the block, Treasury Secretary Timothy Geithner was far more somber as he delivered the bad news about the state of Medicare's finances.

Secretary TIMOTHY GEITHNER (Department of Treasury): Medicare's Hospital Insurance Trust Fund is projected to become exhausted in 2017, two years earlier than projected in last year's report.

ROVNER: Health and Human Services Secretary Kathleen Sebelius said the news about Medicare should make lawmakers redouble their efforts on a full health system overhaul.

Secretary KATHLEEN SEBELIUS (Department of Health and Human Services): The only way to truly slow Medicare spending is to slow overall health care spending to comprehensive and carefully crafted legislation.

ROVER: Over at the Senate, that's pretty much what the Finance Committee was trying to do at the last of three public sessions prior to writing an actual health care bill. First, however, advocates of a single payer government-financed health system disrupted the proceedings for the second week in a row.

Unidentified Woman: …Americans for 30 years.

Senator MAX BAUCUS (Democrat, Montana; Chairman, Senate Finance Committee): Here we are. You know, standard recess until the police can restore order.

Unidentified Woman: We want single payer at this table.

ROVNER: And for the second week in a row got themselves arrested at the direction of Committee Chairman Max Baucus of Montana. Baucus, however, insisted he wasn't purposely excluding those who back a single payer plan.

Sen. BAUCUS: It's a long haul process. And so those of you in the audience who are not panelists and wish to be heard, I urge you just to contact my office. We'll figure out a way to talk to you. I'll figure out a way to listen to you. I'll be there personally.

ROVNER: But when the protest died down, senators took on and even more contentious issue: how to finance what could be a $1.5 trillion price tag for the health bill they're about to write. Several of the experts summoned to advise the senators had the same suggestion. This came from health economist Gail Wilensky, who advised for Republican presidential candidate John McCain.

Dr. GAIL WILENSKY (Health Economist): The first one is to go after the tax treatment of employer sponsored insurance. It's regressive, it's inefficient and it's a lot of money.

ROVNER: She's referring to the fact that workers don't pay tax on the value of health insurance provided by their employers. McCain campaigned to eliminate that tax break last year, so it's not surprising Wilensky would be for it. But here it was also being endorsed by MIT political scientist Jonathan Gruber, considered far more of a liberal.

Professor JONATHAN GRUBER (Political Scientist, MIT): This is a large amount of dollars we're talking about. It's about $250 billion as of a year two ago, making it the second largest federal health care program in America.

ROVNER: Now Chairman Baucus was quick to make clear he wasn't going to go as far as Senator McCain did last year and suggests getting rid of the tax exclusion entirely.

Sen. BAUCUS: To be honest, I don't think we're going to repeal the exclusion. That's just not going to happen.

ROVNER: But he left he door wide open for possible changes that stopped short of getting rid of the exclusion. For example, one possibility, said John Shields of the number-crunching Lewin Group, would be to make people pay taxes on only the most expensive health care policies.

Mr. JOHN SHIELDS (The Lewin Group): The tax exclusion for health benefits, if we were to cap that at, say, the average amount per worker right now, you'd raise about $700 billion in revenues over 10 years.

ROVNER: Meanwhile, back at the White House, officials continued to stress that the president doesn't like the idea of potentially taxing health insurance benefits. But they also said that redoing the health care system, including Medicare, is a long process, and this is just the beginning.

Julie Rovner, NPR News, Washington.

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Q&A: Recession Hits Social Security, Medicare Funds

Social Security trust fund graphic
NPR
Medicare trust fund graphic
NPR

The condition of the government's biggest benefit programs worsened in the last year because of the recession and because people are living longer, an annual report card says.

Social Security's trust fund will be essentially used up by 2037 — four years sooner than last year's estimate, its trustees reported. Medicare won't be able to meet its obligations beginning in 2017 — two years sooner than previously projected, the trustees said.

The annual report released Tuesday by the programs' trustees shows that if the federal government did nothing before 2037, Social Security could pay only 78 percent of promised benefits after that date.

Here are some questions about what these estimates mean and how the programs work — as well as some possible solutions and their political implications.

How has the recession worsened the finances of both programs?

Both Social Security and Medicare are funded by the payroll taxes paid by virtually all workers. Because so many people have lost their jobs during this recession — 5.7 million so far — the revenue from payroll taxes has declined. That means the balance in the trust funds is less than was anticipated.

Remind me how Social Security's finances work.

Current workers pay the benefits for current retirees. In fact, current workers pay more in payroll taxes than is required to pay all Social Security benefits being paid right now. The surplus is used to buy special U.S. treasury bonds that go into the Social Security trust fund.

As more people in the baby boom generation retire, the number of workers for each retiree will fall. Eventually, the payroll taxes paid by workers won't cover all the promised retiree benefits. That's now expected to happen in 2016. At that time, the Social Security trust fund will begin to redeem its U.S. treasury bonds to fill the gap. The 2009 trustees report estimates the trust fund will have used all its bonds by 2037, at which time Social Security will be able to pay only 78 percent of currently promised benefits.

What are the prospects that I'll get my promised benefits if I retire after 2037?

You're almost certain to receive a large portion of the promised benefits, though possibly not all of them. But the prospect that Congress would allow Social Security payments to drop 22 percent in one year in 2037 is politically unthinkable.

So what can the government do to avoid this?

Solving Social Security's financial problems is a big political challenge, but not a huge financial challenge. Some combination of a small payroll tax increase and modest reductions in benefits could close Social Security's financial gap. There is no shortage of proposals to do this. It's also possible lawmakers could look for other sources of revenue to close the gap.

What happened to the idea of allowing individuals to privatize a part of their Social Security contributions?

One of the reasons it's been difficult to make changes in Social Security financing in recent years is because the debate got bogged down in arguments over whether a portion of the payroll tax should be diverted into private investment accounts. That idea is less in vogue now after the huge fall in the stock market. With that option off the table, it may be easier politically to get a financial fix.

Now remind me how Medicare is financed.

It's rather complex, so let's take a step back. Health care coverage is available under Medicare to anyone who is eligible for Social Security benefits, including the elderly but also the disabled. It's financed by a combination of taxes, subsidies and out-of-pocket payments by those who use the system.

Medicare Part A covers hospital stays. It is paid for by direct taxes on workers and employers, plus set fees in the form of deductibles and coinsurance, which are paid by those using the services. The fees vary every year, but are generally more than what it would cost under a private insurance plan.

The report out Tuesday concerns only the trust fund for Part A. The other sections of Medicare are funded through premiums or revenues from income tax. In 2008, Part A was financed by a 1.45 percent add-on to the Social Security tax.

What about Medicare Parts B, C and D?

Part B is a little trickier. Medicare Part B, or supplemental insurance, is intended to cover what Part A doesn't — things like doctor visits and, more recently, preventive care, like mammograms and prostate cancer screening.

It's technically voluntary, but most people buy into the system. It costs an individual $96.40 per month, plus deductibles and co-pays.

Part C is known as Medicare Advantage. It's essentially a program run by private-sector health insurers — HMOs — that compete with each other to offer seniors additional health services for additional fees. The government pays the plans to provide this service, the amount of which is controversial.

In 2003, Congress passed a bill that added a Part D to Medicare, making prescription drug coverage available for purchase through the program for the first time. However, after a heated debate, Congress declined to allow the program the ability to negotiate drug prices directly, which might have helped keep costs down but was seen as too much government interference in the market.

And what are the options to keep Medicare solvent in the long term?

The problem is Medicare, just like private health plans, has always battled spiraling costs. Among the factors: demand for coverage of new technologies, the need for long-term disease management and the simple fact that people are living longer, even when they are sick.

Over the years, Congress has tried various ways to slow the growth of Medicare by limiting payments to health providers, improving efficiencies and opening up parts of the plan to private competition.

In a nutshell, Congress can raise taxes, cut benefits or make changes to the way health care is delivered. It will likely aim for a combination of all three when it tries to overhaul the system later this year.

What are some of the political considerations to getting any of that done?

President Obama is pushing hard for a major health care overhaul, and powerful business groups, health insurers and labor unions pledged Monday to help the president find substantial savings. Congressional committees are working in a more bipartisan way than in the past on changes to the system, a big part of which would be to fix Medicare. Achieving real savings while covering more people is easier said than done.

As the Obama administration likes to say, more and more people are realizing that doing nothing is no longer an option. The problem is not everyone agrees on what needs to be done.

Medicare is still financially unprepared for the baby boomers to join the system, starting in 2010, so the time might be right to push for an overhaul, since a deadline is imminent. There's nothing like a deadline to get Congress motivated.

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