Social Security, Medicare Trustees Project Financial Worries

Trustees for the government's two biggest benefit programs warned that Social Security and Medicare are facing "enormous challenges" with the threat to Medicare's solvency far more severe.

The trustees, issuing their once-a-year analysis, said the resources in the Social Security trust fund will be depleted by 2041. The reserves in the Medicare trust fund that pays hospital benefits were projected to be wiped out by 2019.

Both those dates were the same as in last year's report. But the trustees warned that financial pressures will begin much sooner when the programs begin paying out more in benefits each year than they collect in payroll taxes. For Medicare, that threshold is projected to be reached this year and for Social Security it is projected to occur in 2017.

Both programs are expected to come under increasing pressure as 78 million baby boomers start retiring and drawing benefits.

"The financial difficulties facing Social Security and Medicare pose enormous challenges," the trustees said in their report. "The sooner these challenges are addressed, the more varied and less disruptive their solutions can be."

Treasury Secretary Henry Paulson, one of the trustees, warned of a fiscal train wreck unless something is done.

"Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," Paulson told a news conference where he and the other trustees released the report.

President Bush, who wanted to make overhauling Social Security a top priority in his second term, tapped Paulson to lead that effort. However, Paulson has been unable to forge a consensus with Democrats, who took control of Congress in 2006. He has complained that he is getting tired of playing "solitaire."

Democrats contend that Bush lost valuable time after his 2004 re-election pushing a plan to allow younger workers to direct their payroll tax contributions into private accounts, an idea that went nowhere in Congress.

Reaction in Congress divided along party lines with Republicans saying the new report was an urgent call for action while Democrats accused Republicans of using the report as an excuse for making Draconian cuts in benefits.

For the second year, the report contained a Medicare funding warning that will require the next president to submit soon after he sends his first budget to Congress next year recommendations for dealing with a shortfall in Medicare taxes and projected benefits.

Bush submitted the first of these required responses in February. He recommended among other things that wealthier Medicare beneficiaries pay higher monthly premiums for prescription drug coverage. Under the 2003 law that provided for drug benefits under Medicare, the president is required to submit cost-saving proposals to Congress if the trustees project Medicare will need to rely on general revenue for more than 45 percent of its funding in any future year.

Administration officials said Tuesday that Bush's recommendations, along with proposals to slow Medicare's growth included in the budget, would make a significant dent in the program's shortfalls. However, Democrats have attacked the proposals, making the prospect for legislation this year unlikely.

House Ways and Means Committee Chairman Charlie Rangel said Congress "will do what we have to in order to restore long-term financial stability to these programs."

But many analysts think the whole debate will be left for the next president to take up with Congress, given the difficulty of making changes in such politically sensitive programs as Social Security and Medicare during an election year.

While the Social Security trust fund will have resources until 2041, the more critical date in terms of government revenues will occur in 2017. In that year, Social Security, which has been providing billions of dollars in surpluses to the government for over two decades, will start having to pay out more in benefits than it will receive that year in payroll taxes.

At that point, the government will have to start replacing the money it has borrowed from the Social Security trust fund. It can do that only by increasing borrowing from the public, raising taxes or cutting other government programs. The elimination of the Social Security surplus is a key reason that experts are projecting sizable budget deficits in future years.

In 2041 when the Social Security trust fund is exhausted, the program will be collecting enough in payroll taxes to pay 78 percent of current benefits. That is up from an estimate of 75 percent last year. The improvement came in part from an increase the report made in the number and type of immigrants, both legal and illegal, who will be arriving in the country in future years. The higher number boosts the number of people paying into Social Security.