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Medicare and Social Security: Weighing Solvency

Cori E. Uccello, MAAA, FSA, FCA, MPP Senior Health Fellow, American Academy of Actuaries

Ron Gebhardtsbauer, MAAA, FSA, FCA Senior Pension Fellow, American Academy of Actuaries

April 1, 2005 Noon – 1:00 pm B-339 Rayburn House Office Building

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 1


Seniors Are Living Longer Life expectancies at age 65 (years)

30 25 20 15

17

19

22 19

24 21

17

13

10 5 0 1960

2000 Men

2040

2080

Women

Source: Cohort life expectancies from the 2005 Social Security Trustees’ Report Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 2


Birth Rates Have Declined 6

Average number of children born to a woman in her lifetime

5 4

3.6

3 2.1

2.0

2.0

2000

2040

2080

2 1 0 1960

Source: 2005 Social Security Trustees’ Report Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 3


Seniors Are a Growing Share of the Population

100%

9%

12%

21%

23%

55%

54%

29%

24%

23%

2000

2040

2080

80% 60%

52%

59%

40% 20%

38%

0% 1960

Under 20

20-64

65+

Source: 2005 Social Security Trustees’ Report Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 4


Fewer Workers To Support Each Retiree

10

Population aged 20-64 divided by population aged 65+

8 6

5.8 4.8

4

2.7

2.3

2040

2080

2 0 1960

2000

Source: 2005 Social Security Trustees’ Report Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 5


Poverty Rates Among Seniors Have Declined Dramatically 40%

35%

30%

25%

20%

15% 11%

10%

10%

10%

1999

2003

0% 1959

1969

1979

1989

Source: US Census Bureau’s Current Population Survey. Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 6


Medicare

Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 7


Medicare Trust Fund Basics Hospital Insurance (HI)

Supplementary Medical Insurance (SMI)

Benefits

Inpatient hospital care

Physician and outpatient care; Part D benefit

Financing

Payroll taxes

Beneficiary premiums (~25%) and general tax revenues (~75%) Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 8


HI Costs Already Exceed Non-Interest Income 14%

HI non-interest income and costs as a % of taxable payroll

12%

Cost rate

10% 8% 6%

HI Deficit

4% 2%

Amount of deficit that would be covered by interest earnings and asset redemptions.

Income rate

0% 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 Source: 2005 Medicare Trustees’ Report Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 9


Key Dates For HI Trust Fund • First year outgo exceeds income – Excluding interest income – 2004 – Including interest income – 2012

• Year trust fund assets are depleted=2020 • Trust fund depletion date (2020) is one year later than projected last year, due to: – Slightly lower hospital expenditures – Slightly higher payroll taxes

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 10


Bottom Line for HI Trust Fund • HI tax revenues will cover 79% of benefits in 2020, when trust fund assets are depleted • HI deficit over the next 75 years = $8.8 trillion • Eliminating 75-year deficit would require: – Immediate 107% increase in payroll taxes, or – Immediate 48% reduction in benefits, or – Some combination

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 11


SMI Trust Fund •

The SMI Trust Fund, which includes new Rx benefit, is expected to remain solvent, but only because its financing is reset each year to meet projected future costs. – Projected increases in SMI expenditures will require increases in beneficiary premiums and general revenue contributions over time. ¾ 2004 Part B monthly premium: $66.60 ¾ 2005 Part B monthly premium: $78.20 ¾ 2006 Part B monthly premium (projected): $87.70 SMI expenditures are projected to increase faster than HI expenditures. Therefore, general revenues will finance increasing share of overall Medicare expenditures.

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 12


Total Medicare Expenditures and Income 14%

Percent of GDP

12%

Total Expenditures

10% 8%

Total Non-interest Income

HI Deficit

6% General Revenue

4% State transfers Premiums

2% Tax on Benefits

Payroll Taxes

0% 1969 1979 1989 1999 2009 2019 2029 2039 2049 2059 2069 2079 Source: 2005 Medicare Trustees’ Report Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 13


Limit on General Revenue Financing • If for 2 consecutive Trustees’ Reports, general funding sources account for more than 45% of Medicare spending within the next 7 years, the President is required to recommend ways to reduce this share. – President’s legislative proposal must come within 15 days of next budget submission. • Congress required to consider the legislation on an expedited basis. • Medicare Trustees’ Report estimates that the 45% threshold will be reached in 2012, thereby triggering the provision in 2007. – President’s legislative proposal would be required in 2008. Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 14


Rising Costs Are Key Challenge to Medicare’s Long-Term Sustainability 16% Expenditures as a % of GDP 14% 12% 10% 8% 6% 4% 2% 0% 2000

2010

2020

2030

2040

2050

2060

2070

2080

Source: 2005 Medicare Trustees’ Report Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 15


Social Security

Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 16


Social Security Benefits • Replacement rates maintained – Initial benefits increase by average wages each year • Benefits being paid increase by CPI each year • Payable for life – No matter how long you live – No matter how bad the markets • Disability and Survivor benefits (1/3rd of total benefits) • Spousal benefits (at least 50% of worker’s benefit) – Valuable for traditional family

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 17


S o c ial S e c urity Re plac e me nt Ratio s at No rmal Re tire me nt Ag e (and at Dis ability) 100% 90%

Pe rc e nt o f Earning s Re plac e d

80% 74% 70% 60% 52% 50%

45% 41%

40%

38%

34%

31%

30%

28%

26% 23%

20% 10% 0% $10,000

$30,000

$50,000

$70,000

$90,000

Earning s Jus t Be fo re Re tire me nt in 2005 See History of Provisions at www.ssa.gov/OACT/HOP. Past wages based on National Average Wage Index These percentages decrease by about 2 to 3 percentage points over the next 10 years, per Table VI.F10 in 2005 rpt. Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 18


Social Security Benefits at Normal Retirement Age (and at Disability) $25,000 $22,632

$23,482

$21,587

$20,000

Estimated Benefit

$23,482

$19,169

$20,474

$16,423

$15,000 $13,414

$10,000

$10,400 $7,388

$5,000

$0 $10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000

Earnings Just Before Retirement in 2005 This and prior graph show the primary goals of Social Security: (1) Socially Adequate benefits (progressive benefits that are more important to lower wage earners) (2) Individually Equitable benefits (important to higher wage earners - the more contributed, the more received).

Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 19


Social Security Benefits Paid in Calendar Year 2004

Survivor Benefits 18%

$88 B

Retiree Benefits 66%

$327B $78 B

Disability Benefits 16%

Total Benefits Paid = $493 Billion Source: 2005 Trustees’ Report, Table III.A5 Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 20


Social Security Trust Fund Ratios (Beginning of Year Assets as a % of Expenditures) 700% 600% 500% 400%

Low Cost Intermediate

300%

High Cost 200% 100% 0% 1960

2030 1980

2000

2020 Calendar Year

2041 2052 per CBO

2040

2060

The Social Security Trust Funds are projected to be exhausted in 2041 using the Intermediate Assumptions. The assumptions are reasonable in the aggregate per GAO/PWC report & individually reasonable per SS Chief Actuary. 2005 SSA Trustees’ Report: Table IV.B3. Historical Trust Fund Ratios are from VI.A4. Even on the low cost assumptions, Social Security does not meet their Sustainability Test (trust fund ratios stable or increasing around 75th year). Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 21


Assumptions • Demographic – Fertility – Mortality – Immigration • Economic – Interest Rates on Treasury Bonds – Productivity – Wage Increases – Price Inflation – Labor Force Participation and Unemployment Rates

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 22


Social Security Income & Outgo Intermediate Assumptions 20 Estimates

Actual

% of taxable payroll

Outgo 15

17.5

19.1

Greater Life Spans

$7.1 Trillion

PV = $4.0 Trillion

Baby Boom

Income

13.4 2017 SSA 2020 CBO

10

74% of outgo in 2041

68% of outgo in 2080

5

Calendar Year 0 1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

2060

2070

2080

2005 Trustees Report Table IV.B1. Using low (high) cost assumptions, the 2080 outgo is 14% (27%), and the 2017 date is 2022 (2013). It's 2027, if interest is included, per Summary. The 75-yr actuarial balance = -1.92% (1.0% per CBO), -4.96, & 0.38% of taxable payroll for the intermediate, high, & low cost assumptions, per Table IV.B4, and 3.5% (1.2% of future GDP) without the 75-yr limit per p. 59 (although we could increase SSNRA some century). Table IV.B6&7, UTL = $12.0 T, so future workers pay for themselves & $0.9 T of UTL

Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 23


Reasons to Reform Social Security Sooner Rather Than Later • More options available to us • More people included in reform • Benefit cuts & tax increases for future cohorts can be less, if desired • We can phase reforms in • We can plan ahead for the changes • We can restore faith in SS and government

Delaying decision could force the solution to rely more on raising taxes

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 24


Conclusion

Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 25


Total Costs of Social Security, Medicare, & Medicaid (as a percent of GDP) 20%

5.6%

Medicaid Medicare D 15%

13.8%

8.5% total Medicare A + B

10%

1.5% 5%

2.7% 6.4% in 2080

Social Security

4.3% in 2005 0% 2000

2010

2020

2030 2040 Calendar Year

2050

2060

2070

2080

Sources: 2005 OASDHI Table VI.F4; SMI from Medicare report Tables III.C14 & 20; and Medicaid from CBO's 10/2000 and 6/14/2002 reports. Today, these programs are half of non-interest government expenses. Their total costs more than triple to 26% (Medicare quintuples, surpassing SS by 2024). If estimates are accurate, they will exceed 20% of the economy, thus absorbing all federal taxes, unless taxes increase or government programs shrink. Copyright Š 2005 by the American Academy of Actuaries Medicare/Social Security briefing 26


Medicare and Social Security: Weighing Solvency

Cori E. Uccello, MAAA, FSA, FCA, MPP Senior Health Fellow, American Academy of Actuaries

Ron Gebhardtsbauer, MAAA, FSA, FCA Senior Pension Fellow, American Academy of Actuaries

April 1, 2005 Noon – 1:00 pm B-339 Rayburn House Office Building

Copyright © 2005 by the American Academy of Actuaries Medicare/Social Security briefing 27


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