Time Running Short for Social Security and Medicare

By Jason Simpkins
Managing Editor
Money Morning

The U.S. Social Security and Medicare programs will run short of adequate funding faster than previously thought, according to a government report released earlier this week.

The Social Security Fund will be exhausted by 2037, four years earlier than previously thought. And the Medicare hospital trust fund will be insolvent by 2017, two years earlier than projected, the report said.

The shortfalls are the result of the significant drop in tax revenue that has stemmed from soaring unemployment and tax cuts.

The Social Security fund represents $2.4 trillion of IOUs from the government, which has borrowed liberally from the program's surplus to fund other projects. The Social Security surplus has allowed the government to avoid borrowing more than $2 trillion over the past 20 years. But as the gap between Social Security's intake and its payout narrows, it becomes increasingly likely that the government will have to act.

"When Social Security needs to draw down the 'surplus,' the Treasury will have to borrow money, raise taxes, or cut other spending in order to redeem the IOUs," Charles Konigsberg, a federal budget expert at deficit watchdog group the Concord Coalition, told CNNMoney.

The Congressional Budget Office projects that Social Security will collect just $3 billion more in 2010 than it will pay out in benefits. The officials who oversee the program estimate that Social Security payouts will surpass the program's revenue by 2016. By 2037 the fund will be exhausted, meaning just 76% of the promised benefits will be able to be paid out.

Medicare is even worse off. Whereas Social Security has about seven years before the program's payout begins to exceed its intake, Medicare is already outspending its tax revenue.

By 2017, the Medicare hospital insurance trust fund will be exhausted, meaning the current level of payroll taxes will only be able to pay 81% of hospital insurance cost.

Lower taxes and higher unemployment have sapped the Medicare fund, but the greater threat continues be rising healthcare costs. Healthcare will consume 17% of the country's GDP this year, and that figure is expected to be 20% by 2017.

"The only way to slow overall healthcare spending is through comprehensive and carefully crafted legislation," said Health and Human Services Secretary and Medicare trustee, Kathleen Sebelius. "This report makes it clear. Reform can't wait."

According to President Barack Obama and Democrats on Capitol Hill, reform is on the way. The President announced Monday that insurers, hospital executives and drugmakers have agreed to cut $2 trillion from the nation's healthcare bills over the next decade.

The goal is not to lower healthcare costs from their current level, but to reduce the rate at which those costs are rising by about 1.5 percentage points a year. Healthcare costs are rising at a rate of 6% to 7% a year. If effectively applied over the next 10 yeas, the rise in costs would be 20% below what is currently expected.

Furthermore, Congress will have legislation fixing the nation's healthcare system before lawmakers take their August recess, the President in conjunction with House Democrats announced yesterday (Wednesday).

"As I've said before and all Americans know, our healthcare system is broken," Obama said. "We've got to get it done... and we don't have any excuses. The stars are aligned."

Congress is scheduled to take its summer district work period from Aug. 3 to Sept. 4.

News and Related Story Links: