Q&A: Recession Hits Social Security, Medicare Funds Social Security's trust fund will be essentially used up by 2037 — four years sooner than last year's estimate, its trustees reported Tuesday. Medicare won't be able to meet its obligations beginning in 2017 — two years sooner than previously projected, they said. The condition of both trust funds has worsened because of the recession and because people are living longer.
NPR logo Q&A: Recession Hits Social Security, Medicare Funds

Q&A: Recession Hits Social Security, Medicare Funds

NPR's John Ydstie, Julie Rovner Report On The State Of The Trust Funds

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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.