STUMP » Articles » Friday Special: Social Security and Medicare Trust Funds - What's Real? » 8 June 2018, 04:34

Where Stu & MP spout off about everything.

Friday Special: Social Security and Medicare Trust Funds - What's Real?  

by

8 June 2018, 04:34

I pre-empt the normal Friday Pension-o-Sphere for this week’s media non-Trump freakout.

SOCIAL SECURITY AND MEDICARE TRUST FUNDS RUNNING OUT OF MONEY

Let me give a representative headline to the recently-released Trustees Reports:

Social Security must reduce benefits in 2034 if reforms aren’t made

Actually, no they don’t have to. They have to if Congress does nothing re: Social Security before 2034.

How likely is that? And how likely that it would specifically be 2034 when it occurs?

Let me let the article start:

In 16 years, Social Security will have to cut benefits by 21% if lawmakers do nothing to cure the program’s long-term funding shortfall.

That’s what the Social Security and Medicare trustees projected in their 2018 annual report released Tuesday.
The trustees estimate that by 2034 the combined trust funds for Social Security — which help fund the old age and disability programs — will run dry. At that point Social Security will be able to pay only 79% in promised benefits to retirees and disabled beneficiaries.

Those projections are roughly on par with last year’s report, which estimated the combined Social Security trust funds would be tapped out by 2034 and would then only be able to pay out 77% of benefits.

No, Congress doesn’t even have the cure the program’s long-term funding shortfall.

They just have to change the prior law, which requires automatic benefit cuts when the Trust Fund officially registers 0.

But the trouble actually is right now (and has been for years), because Social Security specifically is cash flow negative.

Social Security to tap into trust fund for first time in 36 years

This year, like last year, Social Security’s trustees said the program’s two trust funds would be depleted in 2034.

For the first time since 1982, Social Security has to dip into the trust fund to pay for the program this year.

It should be stressed that the reports don’t indicate that benefits disappear in those years. After 2034, Social Security’s trustees said tax income would be sufficient to pay about three-quarters of retirees’ benefits.

Congress could at any time choose to pay for the benefits through the general fund.

Let me address the last part first — Congress can just change the rules. Once the Trust Fund is depleted, then it will be nakedly pay-as-we-go, instead of this bullshit Trust Fund stuff.

NOT THE FIRST TIME THE GENERAL FUND WAS TAPPED

But they’ve drawn on the General Fund (aka big pile of federal revenues, which is fungible) before!

Cast your mind all the way back to 2011/2012: FICA was cut for a couple years…, which would have led into dipping into the Trust Fund. Except Congress decided to make up the FICA shortfall with General Fund revenues.

In December 2010, as part of the legislation that extended the Bush tax cuts (called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010), the government negotiated a temporary, one-year reduction in the FICA payroll tax. In February 2012, the tax cut was extended for another year.

Here is the info for the trust funds.

Let me graph the contributions by source — Payroll taxes (aka FICA), taxation of SocSec benefits, Interest on the Trust Fund, and the General Fund Revenues:

And here you see it by percentage (I changed the vertical scale for emphasis):

So that looks like a lot of cash!

Oh wait, it’s there to pay benefits — so let’s do recepts minus benefits:

Well, I don’t see the issue… oh wait, some of the receipts are interest (aka from the General Fund revenues) and explicit funding from General Fund revenues. Let’s remove those revenue sources and see what happens:

OH.

I SEE.

The problem has been since 2010.

Now, you may see those early year overages, but here’s the deal: all that money got dumped into the General Fund to pay for all the goodies Congress wanted in those years. Then they put an IOU in the Trust Fund. And that IOU accrued interest.

But that money was spent years ago. And the only way to pay those IOUs was assuming that later generations – obviously big because the Boomers would reproduce at adequate rates – would show up and pay for their grandparents’ benefits while they were retired.

Well.

Payroll taxes were a cushy little money source, as long as the Boomers were in their peak years in the workforce. And now that the Boomers are dying — even my puny generation of Xers is larger than the still-alive Boomers — well, the following generations aren’t quite as large as originally assumed would occur.

Underlying spreadsheet here.

MEDICARE TRUST FUND?

There’s this “automatically cut the benefits” rule for Social Security benefits.

What about for Medicare?

Medicare Fund Falls Short in 2026, Sooner Than Last Forecast

Trustees report blames fewer taxes collected, higher spending Report says Medicare expenditures in 2017 totaled $710 billion

The main trust fund behind Medicare, the U.S. health-care program for the elderly and disabled, will be exhausted in 2026, three years earlier than was projected a year ago, the government said Tuesday.

Medicare’s Board of Trustees blamed the earlier depletion forecast on expectations of lower payroll taxes and less revenue from taxing Social Security benefits, both the result of the tax overhaul signed by President Donald Trump last year, according to a senior administration official. Medicare is also expected to spend more than projected last year, the report said.

Now wait a second.

The TCJA didn’t drop FICA. Why would that lead to lower payroll taxes? More people stopping working because taxes dropped? [this doesn’t sound right to me]

The second one is true, though. People don’t realize that Social Security benefits can be taxed …well, let the IRS explain:

IRS Tax Tip 2017-13, February 13, 2017

If taxpayers receive Social Security benefits, they may have to pay federal income tax on part of those benefits. These IRS tips will help taxpayers determine if they need to do so.
….
Only Social Security. If Social Security was a taxpayer’s only income in 2016, their benefits may not be taxable. They also may not need to file a federal income tax return. If they get income from other sources, they may have to pay taxes on some of their benefits. ….

Tax Formula. Here’s a quick way to find out if a taxpayer must pay taxes on their Social Security benefits: Add one-half of the Social Security income to all other income, including tax-exempt interest. Then compare that amount to the base amount for their filing status. If the total is more than the base amount, some of their benefits may be taxable.

Base Amounts. The three base amounts are:
$25,000 – if taxpayers are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2016
$32,000 – if they are married filing jointly
$0 – if they are married filing separately and lived with their spouse at any time during the year

Okay, that doesn’t necessarily clear things up. In my earlier graph, I showed receipts from taxation of SocSec benefits. But it has never been a large percentage.

So, there is a certain portion of the Social Security benefits that could be taxed, and that doesn’t change under the new tax bill.

What did change was the amount of taxes… and that definitely is at a lower level.

But back to the Medicare Trust Fund.

What happens when the Medicare Trust Fund runs out?

MEDICARE TRUST FUND RUNNING OUT MEANS….

Washington Post: A crucial Medicare trust fund will run out three years earlier than predicted, new report says

The financial future of the part of Medicare that pays older Americans’ hospital bills has deteriorated significantly, according to an annual government report that forecasts that the trust fund will be depleted by 2026 — three years sooner than expected a year ago.

The report, issued Tuesday by a quartet of Trump administration officials who are trustees for Medicare and Social Security, reveals that policy changes ushered in by the president and the Republican Congress are weakening the financial underpinnings of the already fragile insurance program.
….
Seema Verma, administrator of the Centers for Medicare and Medicaid Services, called on Congress to embrace Medicare proposals in President Trump’s budget, saying that they “would strengthen the integrity of the Medicare program.” Along with strategies to try to slow spending on prescription drugs, one proposal would shift responsibility for uncompensated care payments from the Medicare program to the Treasury.
….
In keeping with efforts by Health and Human Services Secretary Alex Azar — one of the trustees — to usher in new payment methods that reward qualify and cost efficiency, the report says that “if the health sector cannot transition to more efficient models of care delivery and achieve productivity increases, the availability and quality” of care available to older Americans on Medicare will fall.

Sen. Ron Wyden (Ore.), the top Democrat on the Senate Finance Committee, said in a statement, “This report should eliminate any doubt that Trump’s tax law yanked Medicare closer to insolvency.”

Note, none of them says “Medicare benefits will get cut cut automatically when its Trust Fund runs out”

What happens is Medicare benefits get paid out of the General Fund… which must be appropriated every year.

The thing about Medicare, Social Security, etc. is that Congress passed laws with these Trust Funds so that these “entitlements” could reliably chug out payments without Congressional wrangling (or responsibility) every year.

There is nothing stopping Congress from having to wrangle over these every year. After all, that’s what they used to do.

WHAT IS THE TRUE MEANING OF THE TRUST FUND?

As per Elizabeth Bauer: The Social Security Trust Fund Is Real – But So What?

The Trust Fund is real.

Well, sort of.

The Social Security Administration does indeed invest its surpluses, that is, the revenues from FICA taxes, taxes on Social Security benefits, and interest credited to the fund, less benefits paid out, into government bonds. And if you or I, or, say, a pension fund, happened to exist in government bonds, we wouldn’t consider that investment to be “fake,” or the money to have been “stolen” from us. It’s real money, and we’d have a real right to that money. In the same fashion, the Trust Fund will redeem its bonds when it begins to run deficits.

But that’s not the end of the story.

Consider that the trust fund is not a matter of “us” saving for “our retirement.” There was, to be sure, a real element of building up surpluses during the early years of the program, though not to the degree that would truly make it an advance-funded program, rather than only partially-so. In any event, the Trust Fund was virtually depleted in 1983, and the system would have been unable to pay full benefits but for FICA contribution increases beginning in 1977 and accelerated in a 1983 bipartisan reform bill, which also raised the retirement age to 67 and otherwise stabilized the system’s finances. The funds which have built up since then are the moderate excess of revenues over payouts following the tax hike, not a true pre-funding as you’d see, for example, in a private-sector pension plan. Its function is really just, in principle, to smooth out spending over time.

The trouble is, though, that one can outline what the Trust Fund “is” in terms of accounting and financing, but people tend to look at this in a moral sense. The Trust Fund is the embodiment of American workers’ conviction that, having paid taxes during their working lifetime, they have a moral right to their Social Security benefits, or, more generally, to a retirement free of financial worry. And this is not the case.

Read the whole thing.

So, let’s see. Do cash flows care what you feel about them?

Many people do feel like they’ve earned Social Security benefits even though they never paid the amount in that they got out… and they sure as heck didn’t produce enough of a next generation to keep that going.

But let me get back to that: do people even know what they “earned”? Social Security benefits aren’t that much, even for those who max out. Social Security benefits can be easily implicitly cut… and most of the “feely” people would not have a damn clue how much was really cut.

So whatever. Make sure the elderly aren’t destitute. That’s good enough.

INNUMERACY BITES HARD

I’m big into data visualization, as you can see above.

So the following graph annoyed me:

The graph comes from the Social Security Trustees report, and is used as proof of affordability in the article FOX is Scaring Americans With Lies About Social Security. The 2018 Trustees Report Reveals the Truth.

This is the line introducing the graph:

As the trustees’ report reveals and the following graph shows, Social Security’s cost over the next three-quarters of a century and beyond is essentially a straight line:

Yes, a straight line after you increase from 5% of GDP to 6% GDP.

People look at those numbers and think “1 percent increase”.

Nope, that’s a

Hmm, maybe I should have made that red, too.

If it were translated back into money terms, then we’d see it was actually a 20% increase in a relatively short amount of time. That’s actually worrisome. Especially given other things that consume GDP… like Medicaid/Medicare.

BOTTOMLINE RESULTS

Medicare? I’m not even messing with that. Right now.

Social Security has been a drag on the General Fund Revenues since 2010.

The Trust Fund accounting fiction had kept us realizing the problem until 2018.

But that problem has been around for many years. None of this has been a surprise. And it’s not a “crisis”, unless you thought that government promises were set in stone or reliable.

And one bonus dataviz courtesy Andrew Biggs:


Enjoy the weekend!


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