Trustees Make Clear Social Security, Medicare Must Be Reformed

Each year, the board of trustees for Social Security and Medicare release reports highlighting the financial outlook and solvency for these massive entitlement programs.

"We are looking at over $30 trillion in total obligations that we have to find sources to pay for above and beyond projected payroll tax and premium revenues."

Basically, both Social Security and Medicare are on unsustainable paths and must be reformed.

Take Social Security, for instance. Since 2010, Social Security has been running a permanent cash-flow deficit. That means that taxes collected for the program aren't enough to cover the benefits paid to retirees.

To fill the gap, the program is drawing from the trust-fund balances (first using the interest, then the principal) to keep payments to retirees going. In concrete terms, Treasury will borrow money to repay the trust funds, thus increasing our debt load as we go.

In addition, the Social Security retirement trust fund will be exhausted by 2035, while the disability fund trust will hit the wall in 2016. This is bad news, because the dwindling trust fund determines the spending authority of the program.

Without a positive balance in the trust fund, the program won't have the authority to pay out full benefits, but only what the program collects in taxes -- which today means a 23 percent cut in benefits across the board.

Blahous explains that an alternative to the benefit cut would be to raise "tax revenues by the equivalent of an increase in the current tax rate from 12.4 percent to 16.5 percent -- an increase of nearly one-third in worker tax burdens."

Medicare is in bad shape, too. Medicare Hospital Insurance trust fund will run out of assets in 2026 -- that's two years later than projected last year.

However, we shouldn't pop the champagne quite yet. With less than one year's worth of benefit payments in the trust fund, it's unlikely that these projections will materialize.

The HI trust fund, like the SS one, determines the spending authority of the programs, which means that when the HI trust fund dries out, the program won't have the authority to pay out all benefits beyond what the program collects by itself, income from premiums and payments by states.

Finally, even these numbers are too optimistic since, among other things, some of the expected revenue or cost savings in the president's health care law (the so-called Obamacare) may never materialize.

Paul Spitalinic, the acting chief actuary of the program, for instance, explains at the end of the trustees' report that "current law would require a physician-fee reduction of an estimated 24.7 percent on January 1, 2014 -- an implausible expectation."

He then goes on to list a number of other cost-reduction or revenue raisers that shouldn't be expected to materialize making the rest of the projections in the report somewhat moot.

Our recent improved short-term fiscal outlook may give lawmakers a false sense of safety. This would be unfortunate since the trustee's report confirms once again that the long-term outlook of both Social Security and Medicare requires immediate attention and prompt reforms.

What's more, the longer Congress delays dealing with these issues, the worse the shock will be. The good news is that are many options to address our problems -- the most unacceptable one is to do nothing.