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Social Security outlook bleak


Each year the trustees of the Social Security and Medicare Trust Funds report on the current and projected financial status of the two programs. The news isn’t good.

“The financial condition of the Social Security and Medicare programs remains problematic,” a summary of the 2007 report, issued on April 23, begins.

The trustees believe their currently projected long-run growth rates are not sustainable under current financing arrangements.

Social Security’s current annual surpluses of income over expenditures will decline and then turn into rapidly growing deficits as the baby-boom generation retires. When?

Projected tax income will begin to fall short of outlays in 2017 and will be sufficient to finance only 75 percent of scheduled annual benefits in 2041, when funds are projected to be exhausted.

Medicare’s financial status is even worse, according to the report. Medicare’s Hospital Insurance Trust Fund already is expected to pay out more in hospital benefits this year than it receives in taxes and other dedicated revenues.

It’s projected that the HI Trust Fund’s annual assets will drop below projected annual expenditures in 2013.

The projected date of HI Trust Fund exhaustion is 2019, one year later than in last year’s report, when income from taxes will be sufficient to pay only 79 percent of HI costs.

Part B of the Supplementary Medical Insurance Trust Fund, which pays doctor bills and other outpatient expenses, and Part D, which pays for access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet next year’s expected costs. But both Parts B and D will require more and more general revenue financing and charges to beneficiaries as time goes on.

Decreasing reserves, of course, place mounting pressure on the federal budget. In fact, this pressure is already evident. For the first time, a “Medicare funding warning” is being triggered, signaling that nondedicated sources of revenue — chiefly, general revenue — will soon account for more than 45 percent of Medicare’s outlays.

By law, this warning requires that the President propose, and the Congress consider, remedial action.

Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 16 percent in payroll tax revenues, or an immediate reduction in benefits of 13 percent , or some combination of the two. To the extent that changes are delayed or phased in gradually, larger adjustments in scheduled benefits and revenues would be required that would be spread over fewer

generations.

The HI Trust Fund program could be brought into actuarial balance over the next 75 years by an immediate 122 percent increase in the payroll tax, or an immediate 51 percent reduction in program outlays or some combination of the two.

As with Social Security, adjustments of greater magnitude would be necessary to the extent that changes are delayed or phased in gradually.

Say the Trustees: “We are increasingly concerned about inaction on the financial challenges facing the Social Security and Medicare programs.”

Over the past few years, President Bush has championed the restructuring of Social Security.

“Privatization” of Social Security would result in the creation of individual accounts in which benefits would be funded increasingly through personal savings and investments.

Thus far, the concept has been greeted with a mixed reaction. In the fiscal year 2008 budget, the President has continued to support this approach.

But the outlook for significant changes to Social Security and Medicare during the President’s tenure appear cloudy at best. Discussions are still under way, but there has been no real progress.





Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this and other personal finance issues, call the center at 865- 971-2321.

 

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