Clock is Ticking on Entitlement Programs

Today marks the 50th Anniversary of Medicare and Medicaid, which were signed into law on July 30, 1965 by President Lyndon Johnson. These programs, along with Social Security, are collectively referred to as entitlement programs and are taking up a growing proportion of the annual budget. This problem is overshadowed by an even larger danger for Medicare and Social Security: their trust funds are about to dry up.

The Trustees of the Social Security and Medicare trust funds recently released their annual report on the financial status of the two programs. As expected, not much has changed from last year’s report, and the funds of both programs are expected to be depleted within the next 20 years. However, some of the funds are in more desperate need for attention than the others.

According to the report, the Social Security Disability Insurance fund is expected to be depleted next year. Under current law, once the funds are depleted, payments can only be made equal to the revenues for that year. The report finds that starting in 2016 the income for the program will be equal to 81 percent of program costs. Depletion of the fund will affect the 11 million Americans who currently collect DI payments.

“While legislation is needed to address all of Social Security’s financial imbalances, the need has become urgent with respect to the program’s disability insurance component,” reads the summary of the report. “Lawmakers need to act soon to avoid automatic reductions in payments to DI beneficiaries in late 2016.”

One concern is that rather than address the problem of a depleted DI fund, Congress will simply combine the DI trust fund with the Old Age and Survivors Insurance (OASI) trust fund. This action would do two things, neither of which would fix the problem of underfunded entitlement trust accounts.

First, combining the DI and OASI trust funds would move up the date of depletion of the OASI fund from 2035 to 2034. Second, combining the funds would only delay the inevitability of the funds’ failure and leave the problem for a future Congress to solve.

Rather, Congress should take this opportunity to institute real substantial changes that would ensure the feasibility of the trust funds. If Congress does nothing, or only combines the two Social Security trust funds, after 2034 the tax income will not be sufficient to pay a full quarter of all scheduled benefits.

The costs of the combined Social Security (OASDI) trust funds are expected to jump from 4.1 percent of GDP in 2007, to 6.0 percent of GDP in 2037. Likewise, benefits, as expressed by taxable earnings, are expected to increase from 11.3 percent in 2007 to 16.7 percent in 2038.

It is not just Social Security that is facing a funding shortfall; Medicare is in the same position. The Trustees project that the Medicare Hospital Insurance Trust Fund will run out of funds in 2030. From that point revenues will be sufficient to pay only 86 percent of Hospital Insurance costs. This number will decrease to 80 percent in 2050.

The Trustees also project total Medicare expenditures to increase from 3.5 percent of GDP in 2014 to 5.4 percent of GDP in 2035.

The Trustees conclude: “Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.”

What Congress does, or does not do, to solve the problem with the shortfall in the DI Trust Fund will go a long way to show what it will do when the larger OASI and Medicare problem comes up. Rather than kicking the can down the road, Congress needs to address the insufficiencies of our entitlement programs and get them on a path of sustainability.

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