Social Security, Medicare Trustees Issue Their 2015 Report

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Earlier this year, all participants in the Hotel Trades Council’s pension fund received in their home mails an annual report of funding status from the pension fund’s trustees. In fact, all U.S. workers who participate in a pension fund can expect to receive this report from its trustees each year because it is required by law.

At the same time, however, the trustees of the Social Security and Medicare trust funds are also required to provide an annual report on the status of those funds, but few current or future participants even know about it. That’s because the trustees of the Social Security and Medicare trust funds are not required to distribute that report to every current or future beneficiary.

It is for this reason that the union tries to summarize the Social Security and Medicare Trustees report each year in Hotel Voice. The union does this because Social Security and Medicare are government programs that will directly affect every person reading Hotel Voice. Our Union believes it is important for everyone to understand the problems these programs face and to know the solutions—both good and bad—that are being suggested to bolster them.

Anyone who lives past age 62 will expect to collect Social Security retirement benefits, and virtually every person who reaches age 65 will use Medicare in some capacity. That’s why the preservation of these programs should be a top political priority in the U.S. Congress and a top priority to all working men and women in the U.S.

The 2015 Report

The 2015 annual report by the trustees of Social Security and Medicare is in and, like last year, the news is actually better than expected in some areas. While both programs continue to pay all benefit obligations and will do so for some years to come, a look at the long-term future of both benefits reveals that they are still in some trouble. Voters need to understand why this has happened and what steps are available to correct the situation.

The 2015 trustees report says that neither Medicare nor Social Security can sustain projected long-run program costs in full under currently scheduled financing. It adds the strong advice that legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.

The trustees further report that Social Security and Medicare together accounted for 42 percent of federal government expenditures in fiscal year 2014, as opposed to 41 percent in 2013 and 38 percent in 2012. They say that both programs will experience cost growth substantially in excess of the U.S.’s gross domestic product growth through the mid-2030s. There are several reasons for this, one of which is lower birth rates—meaning that fewer workers will be in the workforce paying into the program. Another reason is one which has also impacted pension plans: the fact that people are living longer and thus are collecting Social Security and Medicare benefits for longer periods of time than in the past.

Social Security DI

The trustees’ 2015 report says that Social Security’s Disability Insurance (DI) program is in serious trouble, and in fact faces the most immediate financing shortfall of any of the separate trust funds. The report says that while legislation is needed to address all of Social Security’s financial imbalances, the need has become most urgent with respect to the program’s disability insurance component. In short, Congress needs to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016.

Steps Needed Now

While it is obvious that Congress should take immediate steps to repair the funding for Social Security’s Disability Insurance (DI) program, the truth is that it should also not delay in taking steps to strengthen the Old-Age and Survivors Insurance (OASI) portion of Social Security as well as Medicare.

The trustees once again point out that steps taken sooner rather than later would leave more options available and more time to phase in changes so that the public has adequate time to prepare. As they did last year the trustees make it clear once again that by taking action now the impact on vulnerable populations, like the elderly and the sick, will be less harsh.

The trustees also report that both Social Security and Medicare will experience a rise in costs that will exceed the growth of the Gross Domestic Product of the U.S. in the decades ahead. As noted earlier, a big reason for this is the fact that people are living longer, but another reason is the large number of retirements by baby-boomers that began occurring in recent years and will continue throughout the next 15 years.
It should also be noted that resolving funding issues now will help reduce anticipated future federal budget deficits, and there are few reasonable people who can disagree with that opinion.

Funding

The nation’s Social Security program is funded through payroll taxes and interest on the trust fund money that has been raised by those taxes. In 2010, Social Security’s expenditures were more than the amount of funding raised through payroll taxes. That was the first time that has happened in 25 years, and it has happened again every year since then. Making matters worse, the trustees estimate that these expenditures will remain greater than non-interest income in the years ahead, if changes aren’t made. The deficit of non-interest income relative to expenditures has averaged more than $50 billion a year since 2010. In this year’s report the trustees project that this deficit will average about $76 billion a year until 2018, no change from last year’s projection.

It should also be noted that a temporary reduction in the Social Security payroll tax rate that occurred in 2011 and 2012 reduced payroll tax revenues by a total of $222 billion for those two years, but was not the cause of the program’s expenditures exceeding the amount of funding. That’s because the legislation that established the payroll tax reduction for those two years also provided for transfers of revenues from the federal government’s general fund to the trust funds to make up for the deficit created by the tax cut. As workers know all too well from the decline in their paychecks last year, the temporary payroll tax reduction expired at the end of 2012.

Short Term Projections Are OK

The trustees report that the projected 75-year deficit for Social Security Retirement and Survivors Insurance Trust Fund (which provides retirement and survivor benefits) is the largest since 1982. They further project that it will continue to fail the long-range test of solvency. At the same time, however, the Social Security Retirement and Survivors Insurance Trust Fund does satisfy the test for short-range financial adequacy. In this year’s report, the trustees project that the combined trust fund assets will exceed one year’s projected cost through 2027, which is good news because it is the same projection as the last two years. On the other hand, the costs of the Disability Insurance (DI) program standing alone have exceeded non-interest income since 2005, and, as noted earlier, the Trustees project DI trust fund exhaustion in 2016. The trustees emphasize that the DI program faces the most immediate financing shortfall of any of the separate trust funds.

Medicare

Medicare’s financial situation is worse than Social Security’s. There are two Medicare trust funds, one for Hospital Insurance (HI) and one for Supplementary Medical Insurance (SMI), the latter of which is also called Part B (the feature of Medicare that covers doctors’ bills and other outpatient expenses).

But there is also some good news. The projection for the Medicare Hospital Insurance Trust Fund actually improved in between 2012 and 2014. The improvement is due to savings caused by the Affordable Care Act, which is also called Obamacare. But even with that good news the trustees report that the Hospital Insurance fund fails the test of short-range financial adequacy, as projected assets are already below one year's projected expenditures. The fund also continues to fail the long-range test. The Trustees project that the Hospital Insurance Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all future years, as it has since 2008. The projected date of Hospital Insurance Trust Fund exhaustion is 2030, according to the trustees. Long term projections are equally dismal.

On the other hand, the Trustees estimate that Part B of Supplementary Medical Insurance (SMI) and Part D, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. But the Trustees also note that the facts that people are living longer will cause SMI projected costs to grow rapidly from 2.0 percent of the nation’s Gross Domestic Product (GDP) this year to approximately 3.3 percent of its GDP in 2035. Thankfully, health care costs are not rising at the high rates previously projected.

The trustees report for the second year in a row that projected Medicare costs over the next 75 years are substantially lower than they otherwise would have been because of provisions in the Affordable Care Act (Obamacare) that rein in rising costs associated with Medicare.

Trustees’ Conclusion

The trustees have some obvious conclusions in their 2015 report. For starters, they say that the reduction of Social Security and Medicare trust fund reserves will result in mounting pressure on the federal budget. That’s no surprise, but what may surprise some people is that for the seventh consecutive year the trustees have been required by the Social Security Act itself to issue a "Medicare funding warning."

The trustees’ advice to Congress was important news, but it received little exposure in the media. The trustees include three cabinet secretaries, Jacob J. Lew (Treasury Secretary), Sylvia Burwell (Health and Human Services Secretary) and Thomas Perez (Labor Secretary), and three public trustees, and they were unanimous in this conclusion: “Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.”

One Proposed Solution

The future financial solvency of the Social Security and Medicare programs will depend on how courageous members of Congress will be in the years ahead. These are government programs that are extremely popular, and many lawmakers think it would be political suicide to raise payroll taxes or reduce benefits in order to keep them financially solvent.

But, as many unions including our own have pointed out, there is no need to raise tax rates or reduce benefits in order to save the programs. Instead, the cap on FICA should be raised. In 2015 Social Security taxes (FICA) will apply to only the first $120,000 of the income anyone earns in a year. Any annual income in excess of $120,000 is not subject to the payroll tax that funds Social Security. Financial experts say that if all earned income was subject to the Social Security payroll tax instead of only the first $120,000, the program would be financially solvent well into the 22nd Century, with enough money left over to solve Medicare’s financial shortfalls as well.

“We think this information is important to members and their families because Social Security and Medicare are programs that almost all working men and women will use at some time,” Hotel Trades Council President Peter Ward said this week. “It is imperative for all of us to understand that funding for these benefits is beginning to run short and that steps need to be taken sooner rather than later to guarantee their solvency in the future. The trustees of these programs have said so in their 2015 report, and Congress needs to come up with a plan to deal with the trustees’ concerns.”