What to Expect with Medicare & Social Security in the Future

August 2, 2018

Financial Advisor Talking To Senior Couple At Home

Ann has been receiving Medicare ever since she turned 65. She depends on the monthly Social Security check that she contributed to for many years before she retired. Ann’s adult children are at an age now that they are beginning to think of their retirement years ahead of them. They see the benefits that Medicare and Social Security give to their mother. She doesn’t know what she’d do without these benefits. Her children now working and paying into the programs, wonder and worry if these benefits will be there for them as well.

In the last 10 years the number of people age 65 and over has increased 33% to 49.2 million (2016). In 35 years the number of older adults over 65 is projected to almost double to 98 million (2060). The oldest of the old (age 85+) will more than double from 6.4 million in 2016 to 14.6 million in 2040. This is a 129% increase! These statistics taken from the U.S. Census Bureau, the National Center for Health Statistics and the Bureau of Labor Statistics show the increase of the older population and the importance of two major benefits that this population depends on. The increased need and emphasis on these two programs couldn’t be more important.

To try and understand the current and future status of both of these entitlement programs, let’s look at the report issued by the Trustees of the Social Security and Medicare trust funds who issue a report annually on the health of these two programs. The annual report by the Board of Trustees is mandated by the Medicare Modernization Act of 2003 (MMA).

According to the 2018 Annual Report, “Social Security and Medicare together accounted for 42% of Federal program expenditures in fiscal year 2017.” It is expected that both Social Security and Medicare will experience substantial growth in excess of GDP through the 2030’s due to the aging of the baby-boom generation retiring and lower birth rate generations entering the workplace.

What is Social Security?

The Social Security program provides workers and their families with retirement, disability and survivor insurance benefits. There are two funds within Social Security: the Old-Age and Survivors Insurance (OASI) fund that pays retirement and survivor benefits and the Disability Insurance (DI) trust fund. As we all know, workers earn benefits by paying into the system during their working years. A worker becomes eligible for retirement benefits at a certain age depending on when he/she was born, whether he/she wants early benefits or wait for full benefits. If the worker dies, survivor benefits may be paid to eligible dependents. If a worker is disabled and unable to return to work, Social Security Disability benefits may be an option. Social Security started in 1935 has “collected roughly $20.9 trillion and paid out $18.0 trillion, leaving asset reserves of $2.9 trillion at the end of 2017.” In 2017 the report states that “average benefit levels for disabled-worker beneficiaries were lower than expected.” The total number of disabled-worker beneficiaries has been “declining steadily since 2014.” Short term the Trustees believe the funds satisfy the test of short-range (ten-year) financial adequacy. However, the long range actuarial balance fails the test according to the report. Without intervention by lawmakers to make needed policy changes to reduce or eliminate the long-term financing shortfalls, the “trustees project that the combined trust funds will be depleted in 2034.”

Medicare and You.

Medicare, a federally funded program is a health insurance program that helps pay for hospital, home health services, some skilled nursing facility care and hospice (Part A). Part B helps with physician, outpatient hospital, additional home health and other covered services. An individual at age 65 must enroll in both Part A, Part B and Part D, the prescription drug coverage portion. Note: Younger adults with a two year designated disability can apply for Medicare benefits earlier than 65 years of age. Normally, Medicare Part A is deducted from a person’s Social Security check. Since Medicare does not cover all healthcare related costs, individuals may elect to purchase a Medicare supplement and a drug plan. The other alternative is to enroll in a Medicare Advantage plan whereby an individual’s Medicare is “locked in” to the HMO guaranteeing coverage within their system. Some plans within Medicare, a supplement or Medicare Advantage require a share of cost from the patient. Coverage for low income enrollees may be at no cost through Medi-Cal (Medicaid).

In 2017 the Trustees estimated that Medicare Part A fund (Hospital Insurance (HI) Trust Fund) would be depleted by 2029. In this year’s report the Trustees project that this will happen three years earlier by 2026. The report goes on to state, “The HI fund again fails the test of short-range financial adequacy, as its trust fund ratio is already below 100 of annual costs, and is expected to decline continuously until reserve depletion in 2026.”

The outlook for both Part B and Part D is a bit more optimistic. Both Part B and Part D will remain “adequately financed into the indefinite future because current law provides financing from general revenues and beneficiary premiums each year to meet the next year’s expected costs.” With the growth of the older population and rising health care costs, the cost of these two programs is expected to increase. General revenues will finance approximately 75% of the costs. The remainder will be paid by the beneficiaries.

What are the Trust Funds?

Congress established the trust funds under the supervision of the Secretary of the Treasury. The Treasury must account for all disbursements from Social Security and Medicare. The Treasury also “credits Social Security and Medicare taxes, premiums, and other income to the funds. The only disbursements permitted from the funds are benefit payments and administrative expenses. In 2017 the four trust funds paid out benefits to 51.5 million for OASI (Old Age & Survivors Insurance), 10.4 million received DI (Disability Insurance) benefits and Medicare covered 58.4 million beneficiaries.

In summary, the “costs of these programs as a percentage of Gross Domestic Product (GDP) increase substantially through about 2035 because (1) the number of beneficiaries rises rapidly as the baby-boom generation retires; and (2) the lower birth rates that have persisted since the baby boom cause slower growth of the labor force and GDP.”

Due to the current projected difference for 2018 is expected to exceed the 45% threshold in fiscal year 2022, the Trustees will issue “a determination of projected excess general revenue Medicare funding in this year’s report. This is the second consecutive report that the Trustees have made and thus, a “Medicare funding warning” is triggered. As such, the MMA requires that the President “submit to Congress Proposed legislation to respond to the warning within 15 days after the submission of the Fiscal Year 2020 budget. “Congress must treat this legislation on an expedited basis.

For many of us, this issue is current and affects us now as we continue to rely on Social Security and Medicare benefits as we continue to age. Our adult children are on the path behind us and are becoming concerned of what to expect. Be aware of the Social Security & Medicare Boards of Trustees as they continue to review and report their findings to the President, Congress and us. Keep up with these emerging, concerning issues and communicate your thoughts and concerns to your legislators.

Carol Heape, our Founder and CEO, pioneered the development of care services in the region and continues that work today in recognition of the changing values of older adults and the disabled. Elder Options supports older adults, the disabled, and their families by creating services that enable your loved one to experience a life lived fully every day.

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