Financial state of Medicare, Social Security getting worse

WASHINGTON -- The financial health of Social Security and Medicare, the government's two biggest benefit programs, have worsened because of the severe recession, and Medicare is now paying out more than it receives.

Trustees of the programs said Tuesday that Social Security will start paying out more in benefits than it collects in taxes in 2016, one year sooner than projected last year, and the trust fund will be depleted by 2037, four years sooner.

Medicare is in even worse shape. The trustees said the program for hospital expenses paid out more in benefits than it collected in 2008 and will be insolvent by 2017, two years earlier than the date projected in last year's report.

The trust funds are bonds backed by the government's "full faith and credit" but not by any actual assets. That money has been spent over the years to fund other parts of government. To redeem the trust fund bonds, the government would have to borrow in public debt markets or raise taxes.

Treasury Secretary Timothy Geithner, the head of the trustees group, said the new reports were a reminder that "the longer we wait to address the long-term solvency of Medicare and Social Security, the sooner those challenges will be upon us and the harder the options will be."

Geithner said President Obama was committed to working with Congress to find ways to control runaway growth in both public and private health care expenditures, noting the promise Monday by major health-care providers to trim costs by $2 trillion over the next decade.

However, Republicans pointed to the assessments as evidence the Obama administration has failed to come forward with entitlement reform to close the funding gaps.

"Instead of getting existing public programs in order right now, some are saying we should create a new government-run health insurance plan," Sen. Chuck Grassley, the top Republican on the Finance Committee, said in a reference to the administration's health-care proposals. "When we can't afford the public health plan we have already, does it make sense to add more?"

House Republican leader John Boehner said the trustees report "confirms what we already knew: Our nation cannot afford to continue this reckless borrowing and spending spree."

The findings in the trustees report, the annual checkup given the two benefit programs, did not come as a surprise. Private economists had been predicting that the dates the programs would begin to pay out more than they take in and the dates the trust funds would be insolvent would occur sooner given the economic recession.

The deep recession, the worst the country has endured in decades, has resulted in a loss of 5.7 million jobs since it began in December 2007. The unemployment rate hit a 25-year high of 8.9 percent in April.

Fewer people working means less being paid into the trust funds for Social Security and Medicare.

The Congressional Budget Office recently projected that Social Security will collect just $3 billion more in 2010 than it will pay out in benefits. A year ago, the CBO had projected that Social Security would have a much higher $86 billion cash surplus for the 2010 budget year, which begins Oct. 1.

The trustees report projected that Social Security's annual surpluses would "fall sharply this year," then remain at a reduced level in 2010 and be lower in the following years than last year's projections. The report said that the Social Security annual surplus would be eliminated entirely in 2016, reflecting increased demands from the wave of 78 million baby boomers retiring.

That means Social Security will have to turn to its trust fund to make up the difference between Social Security taxes and the benefits being paid out beginning in 2016. The trustees projected the trust fund would be depleted in 2037, four years earlier than the 2041 date in last year's report.

At that point, the annual Social Security taxes collected would be enough to pay for three-fourths of current benefits through 2083. To tap the trust fund, the government would have to increase borrowing or raise taxes because Social Security bonds exist only as bookkeeping entries.

While the government is obligated to redeem those bonds, it has already spent the excess Social Security collections over the years to fund general government operations, providing the trust funds with IOUs.

While the smaller surpluses that will begin this year will not have any impact on Social Security benefit payments, the government will need to borrow more at a time when the federal deficit is already exploding because of the recession and the billions of dollars being spent to prop up a shaky banking system.

Medicare's condition is more precarious, reflecting the pressures from soaring health care costs as well as the drop in tax collections.

Obama on Monday praised the pledge by the health care industry to achieve $2 trillion in savings on health care costs over the next decade, but it was unclear how much help those pledges would be in achieving Obama's goal of extending coverage to some 50 million uninsured Americans. The administration is pushing Congress to pass legislation in this area this year, preferring to tackle health care before Social Security.

The trustees report is likely to set off renewed debate over Social Security and Medicare. Critics have charged that the Obama administration has failed to tackle the most serious problems in the budget -- soaring entitlement spending.

The administration on Monday revised its federal deficit forecasts upward to project an imbalance this year of $1.84 trillion, four times last year's record, and said the deficits will remain above $500 billion every year over the next decade.