The Sky is Not Falling on Social Security and Medicare

By Patricia L Johnson

The Social Security Act requires an annual report to Congress on the actuarial status and financial operations of OASI and DI Trust Funds, as well as Medicare Trust Funds. The 2012 report is the 72nd report issued by the Board of Trustees and indicates the following statistics for Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trusts.

A total of 55 million recipients were listed as receiving benefits at the end of 2011 accounting for $736 billion in expenditures:

38 million Retired Workers and Dependents of Retired Workers
6 million Survivors of Deceased Workers
11 million Disabled Workers and Dependents of Disabled Workers
55 million TOTAL

During the same period 158 million workers paid payroll taxes due to receiving earnings covered by Social Security taxes to the tune of $805 billion. Combined trust funds held in special U.S. Treasury Securities increased at the end of 2011 to a total of $2.7 trillion dollars.

The latest report indicates the Trust Fund for Social Security OASI reserve benefits will be exhausted by 2033 (three years earlier than the 2011 report) while the Trust Fund reserve for Disability benefits will be depleted by 2016 (two years earlier than the 2011 report). The word ‘exhausted’ simply means the trusts would not be able to pay 100 percent of benefits past 2033 for OASI and 100 percent of benefits past 2016 for DI. Beneficiaries would still be able to obtain reduced benefits. Where they would be scheduled to receive 100 percent prior to the two dates, they would only receive 75 percent in benefits for the remainder of the 75-year period in question. That would be under the assumption that nothing changed in future years.

The Medicare Hospital Trust will remain solvent through 2024 when 100 percent of benefits would be paid, (no change from the 2011 report), and past that date the percent of payments would drop to 87 percent for the remainder.

A key to understanding the trustee’s reports is to realize actuarial status and financial estimates are based on current statuses spread over a 75-year period of time and include a tremendous amount of data.

The information you would expect to be included in the calculations is as follows:

  • Covered Employment
  • Insured Population
  • Old-Age and Survivors Insurance Beneficiaries
  • Disability Insurance Beneficiaries
  • Covered and Taxable Earnings, Taxable Payroll and Payroll Tax Contributions
  • Income from Taxation of Benefits
  • Average Benefits
  • Benefit Payments
  • Scheduled Benefit Amount

But calculations also include:

  • Administrative Expenses
  • Railroad Retirement Financial Interchange
  • Military Service Transfers
  • Labor force and Unemployment Projections
  • Gross Domestic Product Projections
  • Interest Rates

Long-range analyses are also based on the following data:

  • Fertility Rates
  • Death Rates
  • Net Immigration
  • Real-Wage Differential
  • Consumer Price Index
  • Disability Incidence Rates
  • Disability Termination Rates

This is not an all-inclusive listing of all data included in the calculations. The fact the Trustees report itself is 252-pages long gives you an idea just how much data goes into the actuarial estimates.

A slight change in any of the various factors included in the report will significantly impact the outcome. Example – Public Law 111-312, Public Law 112-78, and Public Law 112-96 reduced the OASDI payroll tax rate for 2011 and 2012 by two percentage points for employees and for self-employed workers, which created trust deficits of $45 billion for 2011 and a proposed $53 billion for 2012.

For purposes of the trust reports, a program is solvent at any point in time when it is able to pay scheduled benefits, when due, with scheduled financing. The OASDI program would be considered solvent in any period when the trust funds maintain a positive level of assets.

So what would it take for the OASDI Trust Finds to remain solvent throughout the 75-year projection covered in the 2012? All it would take is a tax increase of 2.61 percentage points.

Think about it for a minute, for a little more than a 2 ½ percent increase in taxes, from the current level of 12.40 percent to 15.01 percent, both the OASI and DI Trusts would be solvent for the next 75 years.

© 2012 Patricia L Johnson

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