Good news on health costs, but threats to Social Security and Medicare persist

Finance experts caution against thinking that slower growth in the cost of health care means Congress can rest easy about so-called “entitlement bombs” ticking in the federal budget.

Susan Walsh/AP
Health and Human Services Secretary Sylvia Burwell speaks at a news conference at the Treasury Department in Washington, Monday, July 28, 2014, to discuss the release of the annual Trustees Reports.

Like clockwork each year, the annual reports for Social Security and Medicare warn that the programs are on a fiscally unsustainable course, but this time around there’s also a twist: The outlook for federal health spending on seniors has improved quite a bit.

That’s news worth celebrating, but it also needs to be taken in context of a still-looming challenge.

The projected date when Medicare’s hospital insurance fund will run dry is now 2030, four years later than the prior estimate, according to an annual report released Monday by the Social Security and Medicare trustees.

A recent slowdown in medical inflation is translating into a brighter outlook for future health costs in the federal budget. The Obama administration attributes the progress partly to its own Affordable Care Act, with provisions such as new restraints on Medicare payments to care providers. Independent economists say broader trends – such as higher cost burdens on patients and a slower spread of new medical technologies – are playing a key role.

Finance experts caution against thinking that slower growth in the cost of health care means Congress can rest easy about so-called “entitlement bombs” ticking in the federal budget.

The slower growth of medical spending, if it persists, is meaningful. It’s a sign, for one thing, of how there’s no inevitability to forecasts of fiscal doom. But it doesn’t resolve the question of how to afford the bills for a growing number of American seniors.

The short summary of the Monday reports is this: Both of the big programs on which retired Americans rely are projected to be depleted in less than 20 years. After 2030, Medicare would be able to pay only about 85 percent of scheduled benefits. And starting around 2033, Social Security would cover just about three-quarters of scheduled benefits.

These programs take up a growing share of federal spending. And the projected shortfalls symbolize the mismatch between the promises made to seniors and the funding available to the programs from payroll taxes.

Failure to address the challenge could leave the nation vulnerable to rising public debt, slower economic growth, and shrinking federal dollars to pay for other national needs from infrastructure to defense.

“We must reform these programs if we want to keep them sound for future generations,” said Jacob Lew, the US Treasury Secretary and a trustee for both programs.

Robert Reischauer, another trustee, called the programs “fiscally unsustainable,” despite the way Medicare’s outlook has brightened in recent years. (Back in 2009, the projected exhaustion date for the Medicare fund was 2017.)

The improved picture on health spending was reinforced Monday in a separate report, released by the Congressional Budget Office (CBO).

CBO director Douglas Elmendorf said forecasts of spending on the government’s major health-care programs (not just Medicare) have fallen by about 15 percent since 2010. But the trend line is still upward.

The changed forecasts stem partly from evidence that medical inflation has slowed. Medicare, for example, has seen slow growth in spending per beneficiary over the past four years.

The Obama administration’s Center for Medicare and Medicaid Services, which oversees the Medicare program, emphasizes that the gains coincide with the passage of the Affordable Care Act, also known as Obamacare, in 2010.

“Thanks to the Affordable Care Act, we are taking important steps to improve the quality of care for Medicare beneficiaries, while improving Medicare’s long-term solvency,” agency director Marilyn Tavenner said Monday.

Other health-care experts note that the pace of cost growth has slowed globally during the same period. It could be that, in addition to cost-control efforts embedded in Obamacare, health-care providers are becoming more efficient at delivering care.

In any case, no one is saying Medicare’s finances are fixed for the long term.

As for Social Security, the outlook is more urgent than the simple summary implies. The largest Social Security program, for seniors, is on track for full funding through 2034, but Social Security’s disability benefits face a shortfall starting in 2016.

Some forecasters say a jump in the number of beneficiaries in the disability program in recent years stems mostly from demographics – a bulge of baby boomers at the prime age for drawing on the disability program.

Although Social Security for seniors doesn’t face such urgent trouble, it still needs fixes.

The CBO estimated recently that closing the long-term gap for Social Security would require boosting the payroll tax by 3.54 percent of worker pay. Or, if Congress moved to expose all the pay of high-income workers to the tax, the payroll tax would still need to be raised on all workers (by 1.61 percentage points) unless other reforms were made.

While not outlining a specific proposal on Social Security or Medicare, Treasury Secretary Lew said “we must make manageable changes now so we do not have to make drastic changes later.”

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