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Key Development:A report by the trustees for the Social Security system says FICA programs are approaching insolvency.
Potential Impact:A mix of increased payroll taxes and benefit reductions are a potential solution to the system's financial problems.
An actuarial imbalance in the combined Old-Age, Survivors, and Disability Insurance (OASDI) program is “now the largest actuarial deficit that we have seen in Social Security since the 1983 reforms,” said Charles Blahous, a public trustee for the Social Security system on the April 23 release of the 2012 annual report by the Social Security board of trustees.
In addition, Medicare trustees in a separate report, also released April 23, issued a Medicare funding warning to Congress as required when the general tax revenue used to fund the program has passed a certain threshold amount.
While government general fund reimbursements are expected to replace the likely $112 billion decrease in 2012 OASDI payroll tax revenue because of the temporary reduction in the employee tax rate, those general fund reimbursements make up about 15 percent of the program's noninterest income in 2011 and 2012, the Social Security report said.
Nevertheless, the deficit in comparison with expenditures was about $49 billion in 2010 and $45 billion in 2011. The deficit is projected to rise to about $66 billion from 2012 to 2018 after the economic recovery is expected to be complete and the number of beneficiaries continues to grow at a substantially faster rate than the number of covered workers, the report summary said.
This issue, combined with other economic factors, has led the Social Security trustees to conclude that Social Security trust fund assets would be exhausted by 2033. Once that occurs, there will be enough noninterest income to pay about 75 percent of scheduled benefits to retirees, the report said.
Solvency for the OASDI program can be restored with action by the government, the trustees said.
To resolve the actuarial deficit in funding predicted by the trustee's intermediate assumptions over the next 75 years, lawmakers could pass an immediate 21 percent increase in the OASDI portion of the tax, raising the combined payroll tax rate from 12.4 percent (for 2013) to 15.01 percent, for example. Or, conversely, scheduled benefits would need to be reduced by 16.2 percent right away, the report said. A combination of tax increases and benefit reductions could be used to make the fund solvent again, the report said.
To go beyond solvency and wipe out the accumulated deficit anticipated in the intermediate assumptions, the trustees said an immediate 22 percent increase in the OASDI total combined tax rate to 15.16 percent would be needed, an immediate 17 percent decrease in benefits, or some combination of the two approaches would “eliminate the actuarial deficit and leave an actuarial balance of zero for the OASDI program.”
The trustees are pushing for action by Congress to resolve the OASDI funding and solvency dilemma. There is no way to know what mixture of more tax revenue and restraints on benefit growth would prove to be the most palatable, but adverse effects on current and future beneficiaries would be difficult to avoid if legislative changes are delayed further, the report said.
Separately, long-range financial problems with the Medicare's Part A Hospital Trust Fund will require changes in payroll taxes if there is not a reduction in spending, the program's trustees said April 23 in an annual report on the financial state of the national health program.
The trustees this year issued a Medicare funding warning as required by Congress when they project revenue from the government's general funds to exceed 45 percent of Medicare funding for any of the first seven fiscal years of the projection period. General tax revenue is one source of Medicare funding.
Although Medicare is to remain financially viable until 2024, further reforms beyond those included in the Patient Protection and Affordable Care Act (Pub L. 111-148) are needed to ensure the program's long-term solvency, the report said
Based on the intermediate set of assumptions and current law, the report said lawmakers could address the long-range financial problems faced by Medicare in several ways. They could immediately increase the standard 2.9 percent payroll tax rate to a 4.25 percent rate, or they could immediately reduce expenditures by a corresponding amount. These changes would require an immediate 47 percent increase in the standard tax rate or a 26 percent reduction in expenditures, the report said.
“More realistically, the tax and/or benefit changes could occur gradually but would ultimately have to reach significantly higher levels to eliminate the deficit throughout the long-range period,” the Medicare report said.
The Medicare trustees are Treasury Secretary Timothy Geithner, Health and Human Services Secretary Kathleen Sebelius, Labor Secretary Hilda L. Solis, and Social Security Commissioner Michael J. Astrue. Two other members are public representatives who were appointed by the president and were confirmed by the Senate: Charles Blahous and Robert D. Reischauer, former president of the Urban Institute.
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