Financial Outlook Dims for Social Security

Published: April 23, 2012 - New York Times

WASHINGTON — The financial health of the Social Security system deteriorated in the last year, while the outlook for Medicare stabilized somewhat, the government said on Monday.

The annual report by the trustees for the two federal programs estimated that the Social Security trust funds would be exhausted in 2033, three years earlier than the trustees projected a year ago.

But they left unchanged their estimate that Medicare’s hospital insurance trust fund would be exhausted in 2024. That is the same date that was projected a year ago, and is five years earlier than was projected two years ago.

The central message of the new report remains the same: the two entitlement programs are unsustainable without structural changes that have so far eluded Congress and the administration.

One trustee, Treasury Secretary Timothy F. Geithner, acknowledging that the new assessments are “somewhat more pessimistic,” said that the funds are adequate “for years to come. But what these reports also reinforce is that we must take steps to keep these programs whole for the future.”

The estimates, a perennial source of political ammunition in the debate over federal spending, debt, taxation and spending on entitlement programs, come as Republicans and Democrats are noisily blaming each other for the perilous straits of the programs for the elderly.

“Medicare must be reformed and strengthened or it will soon collapse,” said Lanhee Chen, policy director for the presidential campaign of Mitt Romney. “It also reminds us that President Obama continues to play shell games with the health care of our seniors, taking hundreds of billions from Medicare to spend on Obamacare and now using a bogus experiment to conceal the damage until after the election.”

But Representative Nancy Pelosi of California, the Democratic leader, said that “Despite the repeated efforts of Republicans to privatize Social Security and end the Medicare guarantee, these vital initiatives remain strong.” She argued that the trustees’ report “demonstrates that health care reform has strengthened Medicare by extending its solvency.”When the trustees issued their annual forecast a year ago, the picture was worse for Medicare than for Social Security: the date for Medicare’s trust fund to be drained was moved up by five years, while Social Security’s did not change much.

Even if the trust funds were someday depleted, much of the programs’ benefits could continue to flow, as there would still be a stream of money coming in from payroll taxes. The vexing question is how to address what would nonetheless be an enormous shortfall — and how urgently to act.

In explaining the changes in their Social Security projection, the trustees cited slower growth in average earnings of workers, lower earnings from interest on the trust fund’s holdings of federal debt, and the persistence of unemployment during the slow recovery from the recent recession.

In particular, they projected a lower estimate of average real earnings in the future, primarily because of a surge in energy prices in 2011 that is expected to “be sustained,” as well as slower assumed growth in average hours worked per week after the economy has recovered.

Meanwhile, there has been a continuing payroll tax reduction for workers’ contributions to theSocial Security system; while the spending caps imposed by last year’s broad debt-reduction compromise have kept the damper on Medicare spending for now.

The trustees also acknowledged that there is a lot of uncertainty in their forecast of future Medicare costs, which could turn out to be “substantially larger” than they assume.

For example, they said, the cost reductions required by the new health care overhaul “will depend on the achievement of unprecedented improvements in health care provider productivity,” which may turn out to be unattainable.

There are two Social Security trust funds; the one that covers disabilities is in even worse shape than the one for retirees. The trustees said the Social Security’s Disability Insurance Trust Fund will be exhausted in 2016, two years earlier than last year’s estimate.

Mr. Geithner, in a statement, called for any adjustments to Social Security and Medicare to be “balanced and evenhanded.

“We will not support proposals that sow the seeds of their destruction in the name of reform, or that shift the cost of health care to seniors in order to sustain tax cuts for the most fortunate Americans,” he said.

There are six trustees: three cabinet officers, the Social Security commissioner and the two public representatives.