Social Security and Medicare programs are sliding closer to insolvency, the federal government warned Monday in a new report underscoring the fiscal challenges facing the two mammoth retirement programs as Baby Boomers begin to retire.
The Social Security trust fund, which will provide assistance to more than 45 million people in 2012, will be unable under current trends to fulfill its obligations in 2033, three years earlier than projected last year, the Los Angeles Times reported.
Medicare, which will provide health insurance to more than 50 million elderly and disabled Americans this year, is expected to start operating in the red in its largest fund in 2024, according to the annual assessment by the trustees charged with overseeing the programs. That's unchanged from last year.
We must take steps to keep these programs whole for the future, Treasury Secretary Timothy Geithner, the senior trustee, told reporters Monday.
Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare, the trustees wrote. If they 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.
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If the Social Security and Medicare funds were exhausted, they would still be able to pay benefits because they would continue to collect tax revenue. But the deficits probably would force major cuts.
The dismal outlook was fueled in part by the sluggish economy, which has slowed growth in payroll taxes that sustain the trust funds, according to the trustees, who include administration Cabinet secretaries and two public representatives.
The trustees who oversee both programs say high energy prices are suppressing workers' wages, a trend they see continuing, Bloomberg Businessweek reported. They also expect people to work fewer hours than previously projected, even after the economy recovers. Both trends would lead to lower payroll tax receipts, which support both programs.
The report sparked a round of calls from around Washington Monday for a new effort to tackle the entitlement programs. Most immediately, the trust fund that pays for disability benefits for more than 10 million people is projected to run out of money in four years.
Leaving Medicare and Social Security on autopilot and allowing them to continue to grow beyond their means is no longer an option, said Sen. Orrin Hatch of Utah, the senior Republican on the Senate Finance Committee.
Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans.
Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers' wages. It is paid by both employers and workers. Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program's finances are being made whole through increased government borrowing.
The Medicare tax rate is 1.45 percent on all wages, paid by both employees and workers.
Social Security is split into two funds, one for retirement and survivor benefits and one for disability. The retirement fund is projected to run out of money in 2035 while the disability fund is projected to run dry in 2016. Combined, the two funds will last until 2033.
Social Security's trust funds contain a total of $2.7 trillion. The money is invested in U.S. Treasury bonds. The government has used the cash to pay for other programs.
The trust funds have been paying out more in benefits than they have collected in payroll taxes since 2010. The funds, however, will continue to grow until 2021 because they will earn interest on the Treasury bonds, the trustees said.
The trustees who oversee the programs are Geithner, Social Security Commissioner Michael J. Astrue, Labor Secretary Hilda Solis and Health and Human Services Secretary Kathleen Sebelius. There are also two public trustees, Charles Blahous and Robert Reischauer.