Economy Takes Toll On Medicare, Social Security The 2009 Social Security and Medicare Trustees report released Tuesday showed the funds will be exhausted a couple of years sooner than was reported last year. That's largely because high unemployment rates mean a lower level of payroll tax receipts being paid in to both programs. On the other hand, compared to what's happened to many private retirement accounts, Social Security is looking pretty healthy.
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Economy Takes Toll On Medicare, Social Security

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Economy Takes Toll On Medicare, Social Security

Economy Takes Toll On Medicare, Social Security

Economy Takes Toll On Medicare, Social Security

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The 2009 Social Security and Medicare Trustees report released Tuesday showed the funds will be exhausted a couple of years sooner than was reported last year. That's largely because high unemployment rates mean a lower level of payroll tax receipts being paid in to both programs. On the other hand, compared to what's happened to many private retirement accounts, Social Security is looking pretty healthy.


From NPR News, it's ALL THINGS CONSIDERED. I'm Robert Siegel.


And I'm Michele Norris. You probably have a pretty good idea what the financial crisis has done to your personal retirement accounts. What might be less clear is what the recession is doing to Social Security and Medicare.

SIEGEL: Well, today, the trustees of those two programs confirmed that the bad economy is having a big effect. Medicare's in the worst shape. It's now paying out more than it takes in, and will be insolvent by 2017. Social Security will also exhaust its trust fund four years earlier than expected. NPR's John Ydstie has been looking through the report on Social Security, and NPR's Julie Rovner is covering Medicare, and both join me now in the studio. Hi.

JOHN YDSTIE: Hi, Robert.

SIEGEL: First, John. The date, I gather, for insolvency in Social Security is 2037. What does it mean, that the trust fund will be insolvent in 2037?

YDSTIE: Well, unless the Congress and the president do something about it, it means that Social Security would only be able to pay out about 75 percent of the currently promised benefits. At the current tax rates, that's all that payroll tax, which funds Social Security, would provide. That's, of course, because we're going to have fewer workers paying in for each retiree, as the baby boom retires.

SIEGEL: Why is it happening? Why is insolvency looming closer now?

YDSTIE: Well, surprisingly, the recession is not the biggest reason for the revision. The biggest reason is a new projection on longevity that shows people are just going to be living longer and collecting Social Security for longer. And the second reason is a downward adjustment in long-term U.S. economic growth not associated with the recession, which means less payroll tax revenue to fund Social Security, and third is the recession has put 5.7 million people out of work. That means they have no earned income, so they aren't paying anything into Social Security right now.

SIEGEL: John, let's bring in Julie Rovner right here. Julie, you have -Medicare is in much more immediate financial trouble. It'll be insolvent in 10 years.

JULIE ROVNER: Less than 10 years, actually. It's the Hospital Insurance Trust Fund we're talking about. That's the portion that's funded by the payroll tax. It's, as you mentioned, already spending more than it's taking in. That happened last year. So it's really sort of eating the seed corn. The new report says with the downturn in the economy and with health care costs rising, it will run out of money entirely in 2017. That's two years earlier than predicted last year. And more to the point, it's just eight years from now. So it's a much more immediate problem.

SIEGEL: You cover health care reform. Is it possible that the Medicare situation would be so acute that taking care of Medicare could take precedence over broader health care reform in the Congress?

ROVNER: Well, certainly, that's a claim that we're likely to hear, I think, mostly from people who don't like what Congress and the president are thinking about doing on health care writ large. But health economists make a pretty strong case that the best way to fix Medicare is actually to fix the entire health care. First of all, the drivers of Medicare costs are the same drivers of overall health care costs. It's new technology and using the wrong kinds of services and having the wrong kinds of incentives. So really, you can't fix Medicare without fixing the health care system as a whole. Also, a point that Secretary - HHS Secretary Sebelius made today in the press conference: If you have uninsured people coming onto Medicare, they'll need a lot more services. If you get them insurance before they're eligible for Medicare, they'll be healthier when they get there and cost the Medicare program less.

SIEGEL: But when you talk about cost reducing, reducing health care costs, a lot of the changes that would do that would take some years to phase in. And if Medicare's date with destiny is just eight years, when they're forecasting insolvency, Congress would have to come up with some real cash by that time.

ROVNER: Yes, they will. But there are already a lot of ideas on the table that would take money out of Medicare, and thereby save Medicare money, including things the Democrats have been wanting to do, like cut the overpayments to the private plans that serve Medicare. Just doing that would add two more years of solvency to the trust fund.

SIEGEL: Talking about possible solutions, John, going back to Social Security. If there's a deficit, as you described it, I guess the solutions would be increase Social Security taxes, cut Social Security benefits, or find a lot of new people to start - get a lot of new immigrants, recruit them pronto to start earning some money.

YDSTIE: Exactly. There's no shortage of solutions for Social Security. Specifically, if you did an immediate two-percentage-point hike in the payroll tax or an immediate 13-and-a-half percent cut in benefits, you would solve the problem - or some combination of the two. You could take a 1 percent rise in the payroll tax, six-and-a-half percent cut in benefits. That would do it. Another way you could do it is by limiting the cap on income that's subject to the payroll tax. That would take care of it as well.

So, no shortage of solutions for tackling Social Security. And President Obama has said he wants to do it, but not until after he's dealt with health care and Medicare.

SIEGEL: Thank you, John. John Ydstie and Julie Rovner. Bye-bye.

ROVNER: Thank you.

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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.