2012   Financial Report of the United States Government

United States Government Required Supplementary Information (Unaudited) For the Years Ended September 30, 2012, and 2011

Social Security and Medicare

Social Security

The OASI Trust Fund was established on January 1, 1940, as a separate account in the Treasury. The DI Trust Fund, another separate account in the Treasury, was established on August 1, 1956. OASI pays cash retirement benefits to eligible retirees and their eligible dependents and survivors, and the much smaller DI fund pays cash benefits to eligible individuals who are unable to work because of medical conditions and certain family members of such eligible individuals. Though the events that trigger benefit payments are quite different, both trust funds have the same earmarked financing structure: primarily payroll taxes and income taxes on benefits. All financial operations of the OASI and DI Programs are handled through these respective funds. The two funds are often referred to as the combined OASDI Trust Funds. At the end of calendar year 2011, OASDI benefits were paid to approximately 55 million beneficiaries.

The primary financing source for these two funds are taxes paid by workers, their employers, and individuals with self-employment income, based on work covered by the OASDI Program. Since 1990, employers and employees have each paid 6.2 percent of taxable earnings and the self-employed paid 12.4 percent of taxable earnings. However, in 2011 and 2012, payroll tax rates paid by employees and the self-employed were each reduced by 2 percentage points and the General Fund of the Treasury reimbursed the OASDI trust fund for the resulting reduction in payroll tax revenues. Payroll taxes are levied on wages and net earnings from self-employment up to a specified maximum annual amount, referred to as maximum taxable earnings ($110,100 in 2012), that increases each year with economy-wide average wages.

Legislation passed in 1984 subjected up to half of OASDI benefits to tax and allocated the revenue to the OASDI Trust Funds. In 1993 legislation upped the potentially taxed portion of benefits to 85 percent and allocated the additional revenue to the Hospital Insurance Trust Fund.

Medicare

The Medicare Program, created in 1965, has two separate trust funds: Hospital Insurance Trust Fund (Hi, Medicare Part A) and the Supplementary Medical Insurance Trust Funds (SMI, Medicare Parts B and D 1 ). HI pays for inpatient acute hospital services and major alternatives to hospitals (skilled nursing services, for example). SMI pays for hospital outpatient services, physician services, and assorted other services and products through the Part B account and for prescription drugs through the Part D account. Though the events that trigger benefit payments are similar, HI and SMI have different earmarked financing structures. Similar to OASDI, HI is financed primarily by payroll contributions. Currently, employers and employees each pay 1.45 percent of earnings, while self-employed workers pay 2.9 percent of their net earnings. Beginning in 2013, employees and self-employed individuals with earnings above certain thresholds will pay an additional HI tax of 0.9 percent on earnings above those thresholds. Other income to the HI Trust Fund includes a small amount of premium income from voluntary enrollees, a portion of the Federal income taxes that beneficiaries pay on Social Security benefits (as explained above), and interest credited on Treasury securities held in the HI Trust Fund. As is explained in the next section, these Treasury securities and related interest have no effect on the consolidated statement of Governmentwide finances.

For SMI, transfers from the General Fund of the Treasury financed 75 percent and 74 percent of 2012 program costs for Parts B and D, respectively. Premiums paid by beneficiaries and, for Part D State transfers, financed the remainder of expenditures. With the introduction of Part D drug coverage, Medicaid is no longer the primary payer of drug benefits for beneficiaries dually eligible for Medicare and Medicaid. For those beneficiaries, States must pay the Part D account a portion of their estimated foregone drug costs for this population (referred to as State transfers). As with HI, interest received on Treasury securities held in the SMI Trust Fund is credited to the fund. These Treasury securities and related interest have no effect on the consolidated statement of Governmentwide finances. See Note 26—Social Insurance, for additional information on Medicare program financing.

Figure 1
Social Security, Medicare, and Governmentwide Finances

Figure 1 - Social Security, Medicare, and Governmentwide Finances

Social Security, Medicare, and Governmentwide Finances

The current and future financial status of the separate Social Security and Medicare Trust Funds is the focus of the trustees’ reports, a focus that may appropriately be referred to as the “trust fund perspective.” In contrast, the Government primarily uses the unified budget concept as the framework for budgetary analysis and presentation. It represents a comprehensive display of all Federal activities, regardless of fund type or on- and off-budget status, and has a broader focus than the trust fund perspective that may appropriately be referred to as the “budget perspective” or the “Governmentwide perspective.” Social Security and Medicare are among the largest expenditure categories of the U.S. Federal budget. Together, they now account for more than a third of all Federal spending and the percentage is projected to rise dramatically for the reasons discussed below. This section describes in detail the important relationship between the trust fund perspective and the Governmentwide perspective.

Figure 1 is a simplified graphical depiction of the interaction of the Social Security and Medicare Trust Funds with the rest of the Federal budget2. The boxes on the left show sources of funding, those in the middle represent the trust funds and other Government accounts (of which the General Fund is a part) into which that funding flows, and the boxes on the right show simplified expenditure categories. The figure is intended to illustrate how the various sources of program revenue flow through the budget to beneficiaries. The general approach is to group revenues and expenditures that are linked specifically to Social Security and/or Medicare separately from those for other government programs.

Each of the trust funds has its own sources and types of revenue. With the exception of General Fund transfers to SMI, each of these revenue sources represents revenue from the public that are earmarked specifically for the respective trust fund and cannot be used for other purposes. In contrast, personal and corporate income taxes and other revenue go into the General Fund of the Treasury and are drawn down for any Government program for which Congress has approved spending3. The arrows from the boxes on the left represent the flow of the revenues into the trust funds and other Government accounts.

The heavy line between the top two boxes in the middle of Figure 1 represents intragovernmental transfers to the SMI Trust Fund from other Government accounts. The Medicare SMI Trust Fund is shown separately from the two Social Security trust funds (OASI and DI) and the Medicare HI Trust Fund to highlight the unique financing of SMI. SMI is currently only one of the programs that is funded through transfers from the General Fund of the Treasury, which is part of the other Government accounts (the Part D account also receives transfers from the States). The transfers finance roughly three-fourths of SMI Program expenses. The transfers are automatic; their size depends on how much the program requires, not on how much revenue comes into the Treasury. If General Fund revenues become insufficient to cover both the mandated transfer to SMI and expenditures on other general Government programs, Treasury would have to borrow to make up the difference. In the longer run, if transfers to SMI increase beyond growth in general revenues as shown below, they are projected to increase significantly in coming years—then Congress must either raise taxes, cut other Government spending, reduce SMI benefits, or borrow even more.

The dotted lines between the middle boxes of Figure 1 also represent intragovernmental transfers but those transfers arise in the form of “borrowing/lending” between the Government accounts. Interest credited to the trust funds arises when the excess of program income over expenses is loaned to the General Fund. The vertical lines labeled Surplus Borrowed represent these flows from the trust funds to the other Government accounts. These loans reduce the amount the General Fund has to borrow from the public to finance a deficit (or likewise increase the amount of debt paid off if there is a surplus). However, the General Fund has to credit interest on the loans from the trust fund programs, just as if it borrowed the money from the public. The credits lead to future obligations for the General Fund (which is part of the other Government accounts). These transactions are indicated in Figure 1 by the vertical arrows labeled Interest Credited. The credits increase trust fund income exactly as much as they increase credits (future obligations) in the General Fund. From the Governmentwide standpoint, at least in an accounting sense, these interest credits are a wash.

It is important to understand the additional implications of these loans from the trust funds to the other Government accounts. When the trust funds get the receipts that they loan to the General Fund, these receipts provide additional authority to spend on benefits and other program expenses. The General Fund, in turn, has taken on the obligation of paying interest on these loans every year and repaying the principal when trust fund income from other sources falls below expenditures.

How loans from the trust funds to the General Fund and later repayments of those loans affect tax income and expenditures of the General Fund is uncertain. Two extreme cases bracket the possibilities. At one extreme, each dollar the trust funds loan to the General Fund might reduce borrowing from the public by a dollar at the time the loan is extended, in which case the General Fund could repay all trust fund loans by borrowing from the public without raising the level of public debt above the level that would have occurred in the absence of the loans. At the other extreme, each dollar the trust funds loan to the General Fund might result in some combination of higher General Fund spending and lower General Fund revenues amounting to one dollar at the time the loans are extended, in which case General Fund loan repayments to the trust funds might initially be financed with borrowing from the public but must at some point be financed with a combination of higher general fund taxes and lower General Fund spending than would have occurred in the absence of the loans. In this latter extreme, trust fund loans result in additional largess (i.e., higher spending and/or lower taxes) in General Fund programs at the time the loans are extended, but ultimately that additional largess is financed with additional austerity (i.e., lower spending and/or higher taxes) in General Fund programs at later dates. The actual impact of trust fund loans to the General Fund and their repayment on General Fund programs is at one of these two extremes or somewhere in between.

Actual dollar amounts roughly corresponding to the flows presented in Figure 1 are shown in Table 1 for fiscal year 2012. In Table 1, revenues from the public (left side of Figure 1) and expenditures to the public (right side of Figure 1) are shown separately from transfers between Government accounts (middle of Figure 1). Note that the transfers ($323.5 billion) and interest credits ($126.6 billion) received by the trust funds appear as negative entries under “Other Government” and are thus offsetting when summed for the total budget column. These two intragovernmental transfers are the key to the differences between the trust fund and budget perspectives.

From the Governmentwide perspective, only revenues received from the public (and States in the case of Medicare, Part D) and expenditures made to the public are important for the final balance. Trust fund revenue from the public consists of payroll taxes, benefit taxes, and premiums. For HI, the difference between total expenditures made to the public ($258.2 billion) and revenues ($229.7 billion) was ($28.5 billion) in 2012, indicating that HI had a relatively small negative effect on the overall budget outcome in that year. For the SMI account, revenues from the public (premiums) were relatively small, representing about a quarter of total expenditures made to the public in 2012. The difference ($214.6 billion) resulted in a net draw on the overall budget balance in that year. For OASDI, the difference between total expenditures made to the public ($773.2 billion) and revenues from the public ($613.3 billion) was ($159.9) billion in 2012, indicating that OASDI had a negative effect on the overall budget outcome in that year. OASDI payroll tax revenues were reduced by $112.2 billion in fiscal year 2012 by a temporary 2 percentage point reduction in the payroll tax rate paid by employees and self-employed individuals called for by Public Laws 111-312, 112-78 and 112-96.

The trust fund perspective is captured in the bottom section of each of the three trust fund columns. For HI, total expenditures exceeded total revenues by $16.5 billion in 2012, as shown at the bottom of the first column. This cash deficit was made up by calling in past loans made to the General Fund (i.e., by redeeming Trust Fund assets). For SMI, total expenditures exceeded total revenues by $1.1 billion. The total revenue for SMI is $290.9 billion ($77.4 + $213.5), which includes $210.6 billion transferred from other Government accounts (the General Fund). Transfers to the SMI Program from other Government accounts (the General Fund), amounting to about 72 percent of program costs, are obligated under current law and, therefore, appropriately viewed as revenue from the trust fund perspective. For OASDI, total revenues of $837.9 billion exceeded total expenditures of $773.2 billion by $64.7 billion. Total revenues for OASDI included $224.6 billion of transfers from the General Fund, principally interest credits and $112.4 billion in credits called for by Public Laws 111-312, 112-78 and 112-96 to make up for the reduction in payroll tax revenues attributable to the temporary payroll tax rate reductions.

Table 1
Revenues and Expenditures for Medicare and Social Security
Trust Funds and the Total Federal Budget for
the Fiscal Year ended September 30, 2012
Trust Funds
(In billions of dollars) HI SMI OASDI Total All Other Total 1
Revenues from the public and States:
Payroll and benefit taxes, State grants 223.4 613.3 836.7 836.7
Premiums 6.3 66.3 72.6 72.6
Other taxes and fees   11.1   11.1 1,528.7 1,539.8
Total 229.7 77.4 613.3 920.4 1,528.7 2,449.1
 
Total expenditures to the public 2 258.2 292.0 773.2 1,323.4 2,215.2 3,538.5
 
Net results—budget perspective 3 (28.5) (214.6) (159.9) (403.0) (686.4) (1,089.4)
 
Revenues from other Government accounts:
Transfers 0.7 210.6 112.2 323.5 (323.5)  
Interest credits 11.3 2.9 112.4 126.6 (126.6)  
Total 12.0 213.5 224.6 450.1 (450.1)  
 
Net results—trust fund perspective (change in Trust Fund balance) 3 (16.5) (1.1) 64.7 47.1 N/A N/A

1 This column is the sum of the preceding two columns and shows data for the total Federal budget. The figure $1,089.4 billion was the total Federal deficit in fiscal year 2012.
2 The OASDI figure includes $4.7 billion transferred to the Railroad Retirement Board for benefit payments and is, therefore, an expenditure to the public.
3 Net results are computed as revenues less expenditures.
Notes: Amounts may not add due to rounding.
“N/A” indicates not applicable.

Cashflow Projections

Background

Economic and Demographic Assumptions. The Boards of Trustees 4 of the OASDI and Medicare Trust Funds provide in their annual reports to Congress short-range (10-year) and long-range (75-year) actuarial estimates of each trust fund. Because of the inherent uncertainty in estimates for 75 years into the future, the Boards use three alternative sets of economic and demographic assumptions to show a range of possibilities. The economic and demographic assumptions used for the most recent set of intermediate projections for Social Security and Medicare are shown in the “Social Security” and “Medicare” sections of Note 26—Social Insurance.

Beneficiary-to-Worker Ratio. The expenditure projections for both the OASDI and Medicare Programs reflect the aging of the large baby-boom generation, born in the years 1946 to 1964, and its ultimate passing. Chart 1 shows that the number of OASDI beneficiaries per 100 covered workers is projected to grow rapidly from 35 in 2012 to 49 in 2035 as the baby boom generation enter their retirement years and receives benefits. After 2035 the baby boom’s influence will have dissipated, and it is projected that the beneficiary-worker ratio will continue to rise but at a slower pace due to increasing longevity, reaching 52 beneficiaries per 100 workers in 2086. (In rough terms, the beneficiary-to-worker ratio at any point in time reflects the birth rates experienced by the generations who are retired; the birth rates of the baby boom generations’ parents were much higher than those of the baby boomer generations and the generations to follow them.) A similar demographic pattern confronts the Medicare Program.

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Source: http://www.ssa.gov/OACT/TR/2012/index.html

Social Security Projections

Income and Expenditures. Chart 2 shows historical values and actuarial estimates of combined OASDI annual noninterest income and expenditures for 1970-2086. The estimates are for the open-group population of all workers and beneficiaries projected to be alive in each year. The expenditure projections in Chart 2 and all subsequent charts assume all scheduled benefits are paid regardless of whether the income and assets are available to finance them.

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Source: http://www.ssa.gov/OACT/TR/2012/lr6f9.html

Social Security’s surplus of noninterest income over expenditures was positive every year between 1984 and 2009, negative in 2010 through 2012, and is projected to grow ever more negative over the next 75 years. This pattern reflects the aging of the population documented in Chart 1, as well as growth of the economy and growth in the price level. As described above, surpluses that occurred prior to 2010 were “loaned” to the General Fund and accumulated, with interest, increasing reserve spending authority for the trust fund. The reserve spending authority represents an obligation for the General Fund. Social Security began using interest credits to meet full benefit obligations in 2010, and is projected to begin drawing down trust fund balances starting in 2021 and to exhaust those balances in 2033. After trust fund exhaustion, noninterest income will continue to flow into the fund and will be sufficient to finance 75 percent of scheduled benefits in 2033 and 73 percent of scheduled benefits in 2086.

Income and Expenditures as a Percent of Taxable Payroll. Chart 3 shows annual noninterest income and expenditures expressed as percentages of taxable payroll, commonly referred to as the income rate and cost rate, respectively. Dividing noninterest income and expenditures by taxable payroll serves to isolate the effect of demographics on Social Security finances, and usefully gauges Social Security’s financial imbalances against the size of the Social Security tax base. The time path of the cost rate in Chart 3 closely parallels that of the beneficiary-to-worker ratio in Chart 1.

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Income and Expenditures as a Percent of GDP. Chart 4 shows estimated annual noninterest income and expenditures, expressed as percentages of GDP, the total value of goods and services produced in the United States. This alternative perspective shows the size of the OASDI Program in relation to the capacity of the national economy to sustain it. The gap between expenditures and income generally widens with expenditures generally growing as a share of GDP and income declining slightly relative to GDP. Social Security’s expenditures are projected to grow from 5.01 percent of GDP in 2012 to 6.10 percent in 2086. In 2086, expenditures are projected to exceed income by 1.54 percent of GDP.

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Sensitivity Analysis. Actual future income from OASDI payroll taxes and other sources and actual future expenditures for scheduled benefits and administrative expenses will depend upon a large number of factors: the size and composition of the population that is receiving benefits, the level of monthly benefit amounts, the size and characteristics of the work force covered under OASDI, and the level of workers’ earnings. These factors will depend, in turn, upon future marriage and divorce rates, birth rates, death rates, migration rates, labor force participation and unemployment rates, disability incidence and termination rates, retirement age patterns, productivity gains, wage increases, cost-of-living increases, and many other economic and demographic factors.

This section presents estimates that illustrate the sensitivity of long-range expenditures and income for the OASDI Program to changes in selected individual assumptions. In this analysis, the intermediate assumption is used as the reference point, and one assumption at a time is varied. The variation used for each individual assumption reflects the levels used for that assumption in the low-cost (Alternative I) and high-cost (Alternative III) projections. For example, when analyzing sensitivity with respect to variation in real wages, income and expenditure projections using the intermediate assumptions are compared to the outcome when projections are done by changing only the real wage assumption to either low-cost or high-cost alternatives.

The low-cost alternative is characterized by assumptions that generally improve the financial status of the program (relative to the intermediate assumption) such as slower improvement in mortality (beneficiaries die younger). In contrast, assumptions under the high-cost alternative generally worsen the financial outlook. One exception occurs with the CPI assumption (see below).

Table 2 shows the effects of changing individual assumptions on the present value of estimated OASDI expenditures in excess of income (the shortfall of income relative to expenditures in present value terms). The assumptions are shown in parentheses. For example, the intermediate assumption for the annual rate of reduction in age-sex-adjusted death rates is 0.77 percent. For the low-cost alternative, a slower reduction rate (0.39 percent) is assumed as it means that beneficiaries die at a younger age relative to the intermediate assumption, resulting in lower expenditures. Under the low-cost assumption, the shortfall drops from $11,278 billion to $9,595 billion, a 15 percent smaller shortfall. The high-cost death rate assumption (1.18 percent) results in an increase in the shortfall, from $11,278 billion to $13,069 billion, a 16 percent increase in the shortfall. Clearly, alternative death rate assumptions have a substantial impact on estimated future cashflows in the OASDI Program.

A higher fertility rate means more workers relative to beneficiaries over the projection period, thereby lowering the shortfall relative to the intermediate assumption. An increase in the rate from 2.0 to 2.3 percent results in a 9 percent smaller shortfall (i.e., expenditures less income), from $11,278 billion to $10,217 billion.

Higher real wage growth results in faster income growth relative to expenditure growth. Table 2 shows that a real wage differential that is 0.59 percentage point greater than the intermediate assumption of 1.12 causes the shortfall to drop from $11,278 billion to $9,177 billion, a 19 percent decline.

The CPI change assumption operates in a somewhat counterintuitive manner, as seen in Table 2. A lower rate of change results in a higher shortfall. This arises as a consequence of holding the real wage assumption constant while varying the CPI so that wages (the income base) are affected sooner than benefits. If the rate is assumed to be 1.8 percent rather than 2.8 percent, the shortfall increases about 5 percent, from $11,278 billion to $11,853 billion.

The effect of net immigration is similar to fertility in that, over the 75-year projection period, higher immigration results in proportionately more workers (taxpayers) than beneficiaries. The low-cost assumption for net immigration results in a 4 percent drop in the shortfall, from $11,278 billion to $10,836 billion, relative to the intermediate case; and the high-cost assumption results in a 5 percent higher shortfall.

Finally, Table 2 shows the sensitivity of the shortfall to variations in the real interest rate or, in present value terminology, the sensitivity to alternative discount rates assuming a higher discount rate results in a lower present value. The shortfall is 14 percent lower, decreasing from $11,278 billion to $9,653 billion, when the real interest rate is 3.4 percent rather than 2.9 percent. The shortfall is 18 percent higher, increasing to $13,303 billion, when the real interest rate is 2.4 percent rather than 2.9 percent.

Table 2
Present Values of Estimated OASDI Expenditures in Excess of Income
Under Various Assumptions, 2012-2086
Financing Shortfall Range
Assumption Low Intermediate High
(Dollar values in billions; values of assumptions shown in parentheses)
Average annual reduction in death rates 9,595
(0.39)
11,278
(0.77)
13,069
(1.18)
Total fertility rate 10,127
(2.3)
11,278
(2.0)
12,313
(1.7)
Real wage differential 9,177
(1.71)
11,278
(1.12)
12,745
(0.5)
CPI change 10,696
(3.8)
11,278
(2.8)
11,853
(1.8)
Net immigration 10,836
(1,375,000) 1
11,278
(1,080,000) 1
11,789
(790,000) 1
Real interest rate 9,653
(3.4)
11,278
(2.9)
13,303
(2.4)

1Amounts represent the average annual net immigration over the 75-year projection period.
Source: 2012 OASDI Trustees Report and SSA.

Medicare Projections

Medicare Legislation The Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA) significantly improves projected Medicare finances. The most important cost saving provision in the ACA is a revision in payment rate updates for Parts A and B services other than for physicians’ services. Relative to payment rates made under prior law that were generally based on the rate at which prices for inputs used to provide Medicare services increase, the ACA reduces those payment rate updates by the rate at which productive efficiency in the overall economy increases, which is projected to average 1.1 percent per year. The ACA also achieves substantial cost savings by benchmarking payment rates for private health plans providing Parts A and B services (Part C or Medicare Advantage) to more closely match per beneficiary costs. Partly offsetting these changes was an increase in prescription drug coverage. In addition, the ACA increases Part A revenues by: (a) taxing high-cost employer-provided health care plans and thereby giving employers incentives to increase the share of compensation paid as taxable earnings, and (b) imposing a new 0.9 percent surtax on earnings in excess of $200,000 (individual tax return filers) or $250,000 (joint tax return filers) starting in 2013.

The ACA substantially reduces the Medicare cost projections. Growth in Medicare cost per beneficiary in excess of growth in per capita GDP is referred to as “excess cost growth.” In the 2009 Financial Report, the last Report released prior to the passage of the ACA, excess cost growth was assumed to be about 1 percentage point—that is, Medicare expenditures per beneficiary were assumed to grow, on average, about one percentage point faster than per capita GDP over the long range. That assumption for excess cost growth in Medicare was optimistic in the sense that it is smaller than in recent history; excess cost growth averaged 1.6 percentage points between 1990 and 2007. 5In this year’s Financial Report, as in the 2010 and 2011 Reports, long-term excess cost growth is essentially zero. As a result, the long term projected Medicare spending share of GDP in this Report is driven primarily by the same demographic trends that drive the OASDI spending share of GDP.

The 2012 Medicare Trustees’ Report warns that the “actual future costs for Medicare are likely to exceed those shown by the current-law projections” that underlie both the Trustees’ Report and this Financial Report. This warning is due in part to concerns the new productivity-based downward adjustments to Medicare payment rate updates may not be sustainable, leading to substantial uncertainty about the adequancy of future Medicare payments rates. This concern is reinforced by the fact that statutory adjustments to payment rates for Medicare physicians’ services mandated by a 1996 Medicare reform have been consistently overridden by new law.

Changes in Projection Methods, For the 2012 Medicare Trustees Report, based on the recommendation of the 2010-2011 Medicare Technical Review Panel, the Board of Trustees adopted a long-range pre-ACA baseline cost growth assumption of “GDP plus 1.4 percent” and a “factors contributing to growth” model, which creates specific, year-by-year declining growth rates during the last 50 years of the projection period.

The ACA permanently reduces the annual increases in Medicare rates for most categories of health service providers by the increase in economy-wide productivity. Thus, the long-range cost growth rate for affected providers is set equal to the pre-ACA baseline growth assumptions, minus the increase in economy-wide multifactor productivity (1.1 percent). For the 2012 report, the Medicare Technical Panel concluded that the slower payment updates would have a small, net downward effect on growth in the volume and intensity of services. Based on this conclusion, the growth rates are further adjusted by (0.1 percent) annually.

On net, changes for 2012 resulted in a decrease in the future net cashflow for total Medicare for Part A, these changes resulted in an increase to the present value of expenditures and a very slight decrease on the present value of revenue, with an overall decrease on the future net cashflow. For Part B, these changes increased the present value of expenditures.

Total Medicare. Chart 5 Chart 5 shows expenditures and current-law noninterest revenue sources for HI and SMI combined as a percentage of GDP. The total expenditure line shows Medicare costs rising to 6.73 percent of GDP by 2086. Revenues from taxes and premiums (including State transfers under Part D) are expected to increase from 1.93 percent of GDP in 2012 to 3.02 percent of GDP in 2086. Payroll tax income increases gradually as a percent of GDP because the new tax on earnings in excess of $250,000 for joint tax return filers and $200,000 for individual tax return filers applies to an increasing share of earnings because the $250,000 and $200,000 thresholds are not indexed for price changes. Premiums combined for Parts B and D of SMI are approximately fixed as a share of Parts B and D costs, so they also increase as a percent of GDP. General revenue contributions for SMI, as determined by current law, are projected to rise as a percent of GDP from 1.39 percent to 2.97 percent over the same period. Thus, revenues from taxes and premiums (including State transfers) will fall substantially as a share of total noninterest Medicare income (from 58 percent in 2012 to 50 percent in 2086) while general revenues will rise (from 42 percent to 50 percent). The gap between total noninterest Medicare income (including general revenue contributions) and expenditures begins around 2012 and then steadily continues to widen, reaching 0.7 percent of GDP by 2086.

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Medicare, Part A (Hospital Insurance)-Income and Expenditures. Chart 6 shows historical and actuarial estimates of HI annual income (excluding interest) and expenditures for 1970-2086 in nominal dollars. The estimates are for the open-group population.

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Medicare, Part A Income and Expenditures as a Percent of Taxable Payroll. Chart 7 illustrates income (excluding interest) and expenditures as a percentage of taxable payroll over the next 75 years. The chart shows that the expenditure rate exceeds the income rate in 2008, and cash deficits continue thereafter. Trust fund interest earnings and assets provide enough resources to pay full benefit payments until 2024 with general revenues used to finance interest and loan repayments to make up the difference between cash income and expenditures during that period. Pressures on the Federal budget will thus emerge well before 2024. Present tax rates would be sufficient to pay 87 percent of scheduled benefits after trust fund exhaustion in 2024 and 69 percent of scheduled benefits in 2086.

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Medicare, Part A Income and Expenditures as a Percent of GDP. Chart 8 shows estimated annual noninterest income and expenditures, expressed as percentages of GDP, and the total value of goods and services produced in the United States. This alternative perspective shows the size of the HI Program in relation to the capacity of the national economy to sustain it. Medicare Part A’s expenditures are projected to grow from 1.7 percent of GDP in 2012, to 2.16 percent in 2030, and to 2.71 percent by 2086. The gap between expenditure and income shares of GDP widens and peaks at 0.87 percent in 2046 and then commences a slight decline, reaching 0.85 percent of GDP in 2086.

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Medicare, Parts B and D (Supplementary Medical Insurance). Chart 9 shows historical and actuarial estimates of Medicare Part B and Part D premiums (and Part D State transfers) and expenditures for each of the next 75 years, in dollars. The gap between premiums and State transfer revenues and program expenditures, a gap that will need to be filled with transfers from general revenues, grows throughout the projection period.

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Source: Centers for Medicare & Medicaid Services

Medicare Part B and Part D Premium and State Transfer Income and Expenditures as a Percent of GDP. Chart 10 shows expenditures for the Supplementary Medical Insurance Program over the next 75 years expressed as a percentage of GDP, providing a perspective on the size of the SMI Program in relation to the capacity of the national economy to sustain it. SMI expenditures as a share of GDP are expected to grow rapidly from 2.03 percent in 2012 to 3.35 percent in 2035, and then grow more slowly reaching 4.02 in 2086. This growth pattern reflects growth in Medicare spending per beneficiary that is positive for the first half of the projection period before turning negative as a result of provisions in the ACA and population ageing that is rapid through 2035 as the baby boom generation move into their advanced years and then slows to a modest pace consistent with increasing longevity. Premium and State transfer income grows from about 0.50 in 2012 to 1.06 percent of GDP in 2086, so the portion financed by General Fund transfers to SMI is projected to be about 75 percent throughout the projections period.

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Source: Centers for Medicare & Medicaid Services

Medicare Sensitivity Analysis. This section illustrates the sensitivity of long-range cost and income estimates for the Medicare Program to changes in selected individual assumptions. As with the OASDI analysis, the intermediate assumption is used as the reference point, and one assumption at a time is varied. The variation used for each individual assumption reflects the levels used for that assumption in the low-cost and high-cost projections (see description of sensitivity analysis for OASDI).

Table 3 shows the effects of changing various assumptions on the present value of estimated HI expenditures in excess of income (the shortfall of income relative to expenditures in present value terms). The assumptions are shown in parentheses. Clearly, net HI expenditures are extremely sensitive to alternative assumptions about the growth in health care cost. For the low-cost alternative, the slower growth in health costs causes the shortfall to drop from $5,581 billion to a surplus of $533 billion, a 110 percent change. The high-cost assumption results in a near tripling of the shortfall, from $5,581 billion to $15,332 billion.

Variations in the next four assumptions in Table 3 result in relatively minor changes in net HI expenditures. The higher or lower fertility assumptions cause an approximate 7 percent change in the shortfall relative to the intermediate case. The higher or lower real wage growth rate results in about a 13 and 5 percent respectively, change in the shortfall relative to the intermediate case. Wages are a key cost factor in the provision of health care. Higher wages also result in greater payroll tax income. HI expenditures exceed HI income by a wide and increasing margin in the future (Charts 6 to 8). CPI and net immigration changes have very little effect on net HI expenditures. Higher immigration decreases the net shortfall modestly as higher payroll tax revenue offsets higher medical care expenditures.

Table 3 also shows that the present value of net HI expenditures is 18 percent lower if the real interest rate is 3.4 percent rather than 2.9 percent and 20 percent higher if the real interest rate is 2.4 percent rather than 2.9 percent.

Table 3
Present Values of Estimated Medicare Part A Expenditures in Excess of
Income Under Various Assumptions, 2012-2086
  Financing Shortfall Range
Assumption 1 Low Intermediate High
(Dollar values in billions; values of assumptions shown in parentheses)
Average annual growth in health costs 2 (533)
(3.3)
5,581
(4.3)
15,332
(5.3)
Total fertility rate 3 5,199
(2.3)
5,581
(2.0)
5,947
(1.7)
Real wage differential 4,893
(1.7)
5,581
(1.1)
5,860
(0.5)
CPI change 5,316
(3.8)
5,581
(2.8)
5,812
(1.8)
Net immigration 5,509
(1,375,000) 4
5,581
(1,080,000) 4
5,663
(790,000) 4
Real interest rate 4,558
(3.4)
5,581
(2.9)
6,713
(2.4)

1 The sensitivity of the projected HI net cashflow to variations in future mortality rates is also of interest. At this time, however, relatively little is known about the relationship between improvements in life expectancy and the associated changes in health status and per beneficiary health expenditures. As a result, it is not possible at present to prepare meaningful estimates of the Part A, mortality sensitivity.
2 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low-cost and high-cost alternatives assume that costs increase 1 percent slower or faster, respectively, than the intermediate assumption, relative to growth in taxable payroll.
3 The total fertility rate for any year is the average number of children who would be born to a woman in her lifetime if she were to experience the birth rates by age observed in, or assumed for, the selected year and if she were to survive the entire childbearing period.
4 Amount represents the average annual net immigration over the 75-year projection period.

Table 4 shows the effects of various assumptions about the growth in health care costs on the present value of estimated SMI (Medicare Parts B and D) expenditures in excess of income. As with HI, net SMI expenditures are very sensitive to changes in the health care cost growth assumption. For the low-cost alternative, the slower assumed growth in health costs reduces the Governmentwide resources needed for Part B from $14,815 billion to $10,735 billion and in Part D from $6,778 billion to $4,778 billion, about a 28 percent and 30 percent difference for Part B and Part D, respectively. The high-cost assumption increases Governmentwide resources needed to $21,162 billion for Part B and to $9,949 billion for Part D, about a 43 percent and a 47 percent difference for Part B and Part D, respectively.

Table 4
Present Values of Estimated Medicare Parts B and D Future Expenditures Less Premium Income and State Transfers Under Three Health Care Cost Growth Assumptions, 2012-2086
  Governmentwide Resources Needed
Medicare Program1 Low
(3.3)
Intermediate
(4.3)
High
(5.3)
(In billions of dollars)
Part B 10,735 14,815 21,162
Part D 4,778 6,778 9,949

1 Annual growth rate is the aggregate cost of providing covered health care services to beneficiaries. The low and high scenarios assume that costs increase one percent slower or faster, respectively, than the intermediate assumption.
Source: Centers for Medicare & Medicaid Services.

Sustainability of Social Security and Medicare

75-Year Horizon

According to the 2012 Medicare Trustees Report, the HI Trust Fund is projected to remain solvent until 2024 and, according to the 2012 Social Security Trustees Report, the OASDI Trust Funds are projected to remain solvent until 2033. In each case, some general revenues must be used to satisfy the authorization of full benefit payments until the year of exhaustion. This occurs when the trust fund balances accumulated during prior years are needed to pay benefits, which leads to a transfer from general revenues to the trust funds. Moreover, under current law, General Fund transfers to the SMI Trust Fund will occur into the indefinite future and will continue to grow with the growth in health care expenditures.

The potential magnitude of future financial obligations under these three social insurance programs is, therefore, important from a unified budget perspective as well as for understanding generally the growing resource demands of the programs on the economy. A common way to present future cashflows is in terms of their present value. This approach recognizes that a dollar paid or collected next year is worth less than a dollar today because a dollar today could be saved and earn a year’s worth of interest.

Table 5 shows the magnitudes of the primary expenditures and sources of financing for the three trust funds computed on an open-group basis for the next 75 years and expressed in present values. The data are consistent with the Statements of Social Insurance included in the principal financial statements. For HI, revenues from the public are projected to fall short of total expenditures by $5,581 billion in present value terms which is the additional amount needed in order to pay scheduled benefits over the next 75 years. 6From the trust fund perspective, the amount needed is $5,337 billion in present value after subtracting the value of the existing trust fund balances (an asset to the trust fund account but an intragovernmental transfer to the overall budget). For SMI, revenues from the public for Parts B and D combined are estimated to be $21,593 billion less than total expenditures for the two accounts, an amount that, from a budget perspective, will be needed to keep the SMI program solvent for the next 75 years. From the trust fund perspective, however, the present values of total revenues and total expenditures for the SMI Program are roughly equal due to the annual adjustment of revenue from other Government accounts to meet program costs. 7For OASDI, projected revenues from the public fall short of total expenditures by $11,278 billion in present value dollars, and, from the trust fund perspective, by $8,600 billion.

From the Governmentwide perspective, the present value of the total resources needed for the Social Security and Medicare Programs over and above current-law funding sources (payroll taxes, benefit taxes, and premium payments from the public) is $38,454 billion. From the trust fund perspective, which counts the trust funds ($3,003 billion in present value) and the general revenue transfers to the SMI Program ($21,593 billion in present value) as dedicated funding sources, additional resources needed to fund the programs are $13,858 billion in present value.

Table 5
Present Values of Costs Less Revenues of 75-Year Open-Group Obligations HI, SMI, and OASDI
SMI
  HI Part B Part D OASDI Total
(In billions of dollars, as of January 1, 2012)
Revenues from the public:
Taxes 15,598 - - 45,198 60,796
Premiums, State transfers   5,344 2,349   7,693
Total 15,598 5,344 2,349 45,198 68,489
 
Total costs to the public 21,179 20,159 9,128 56,477 106,943
 
Net results — budget perspective* 5,581 14,815 6,778 11,278 38,454
 
Revenues from other Government accounts - 14,815 6,778 - 21,593
Trust fund balance as of 1/1/2012 244 80 1 2,678 3,003
 
Net results — trust fund perspective* 5,337 (80) (1) 8,600 13,858

*Net results are computed as costs less revenues.
Note: Details may not add to totals due to rounding.
Source: 2012 OASDI and Medicare Trustees’ Reports.

Infinite Horizon

The 75-year horizon represented in Table 5 is consistent with the primary focus of the Social Security and Medicare Trustees’ Reports. For the OASDI Program, for example, an additional $11.3 trillion in present value will be needed above currently scheduled taxes to pay for scheduled benefits ($8.6 trillion from the trust fund perspective). Yet, a 75-year projection can be a misleading indicator of all future financial flows. For example, when calculating unfunded obligations, a 75-year horizon includes revenue from some future workers but only a fraction of their future benefits. In order to provide a more complete estimate of the long-run unfunded obligations of the programs, estimates can be extended to the infinite horizon. The open-group infinite horizon net obligation is the present value of all expected future program outlays less the present value of all expected future program tax and premium revenues. Such a measure is provided in Table 6 for the three trust funds represented in Table 5.

From the budget or Governmentwide perspective, the values in line 1 plus the values in line 4 of Table 6 represent the value of resources needed to finance each of the programs into the infinite future. The sums are shown in the last line of the table (also equivalent to adding the values in the second and fifth lines). The total resources needed for all the programs sums to $66.3 trillion in present value terms. This need can be satisfied only through increased borrowing, higher taxes, reduced program spending, or some combination.

The second line shows the value of the trust fund at the beginning of 2012. For the HI and OASDI Programs this represents, from the trust fund perspective, the extent to which the programs are funded. From that perspective, when the trust fund is subtracted, an additional $20.5 trillion is needed to sustain the OASDI program into the infinite future, while an additional $4.9 trillion is needed to sustain the HI program. However, looking just at present values ignores timing differences in the underlying projected cashflows; the HI Trust Fund is projected to remain solvent only until 2024. As described above, from the trust fund perspective, the SMI Program is fully funded, from a Governmentwide basis, the substantial gap that exists between premiums and State transfer revenue and program expenditures in the SMI Program ($23.6 trillion and $14.3 trillion) represents future general revenue obligations of the Federal budget.

In comparison to the analogous 75-year number in Table 5, extending the calculations beyond 2086, captures the full lifetime benefits, and taxes and premiums of all current and future participants. The shorter horizon understates the total financial needs by capturing relatively more of the revenues from current and future workers and not capturing all of the benefits that are scheduled to be paid to them.

Table 6
Present Values of Costs Less Tax, Premium and State Transfer Revenue through the Infinite Horizon, HI, SMI, OASDI
SMI
  HI Part B Part D OASDI Total
(In trillions of dollars, as of January 1, 2012)
Present value of future costs less future taxes, premiums, and State transfers for current participants 10.1 12.4 4.9 24.3 51.7
Less current trust fund balance 0.2 0.1 - 2.7 3.0
Equals net obligations for past and current participants 9.9 12.3

4.9

21.6 48.7
Plus net obligations for future participants (5.0) 11.3 9.4 (1.1) 14.6
Equals net obligations through the infinite future for all participants 4.9 23.6 14.3 20.5 63.3
 
Present values of future costs less the present values of future income over the infinite horizon 5.1 23.7 14.3 23.2

66.3

Details may not add to totals due to rounding.
Source: 2012 OASDI and Medicare Trustees’ Reports.

Footnotes

1 Medicare legislation in 2003 created the new Part D account in the SMI Trust Fund to track the finances of a new prescription drug benefit that began in 2006. As in the case of Medicare Part B, approximately three-quarters of revenues to the Part D account will come from future transfers from the General Fund of the Treasury. Consequently, the nature of the relationship between the SMI Trust Fund and the Federal budget described below is largely unaffected by the presence of the Part D account though the magnitude will be greater. (Back to Content)

2 The Federal unified budget encompasses all Government financing and is synonymous with a Governmentwide perspective. (Back to Content)

3 Other programs also have dedicated revenues in the form of taxes and fees (and other forms of receipt) and there are a large number of earmarked trust funds in the Federal budget. Total trust fund receipts account for about 40 percent of total Government receipts with the Social Security and Medicare Trust Funds accounting for about two-thirds of trust fund receipts. For further discussion, see the report issued by the Government Accountability Office, Federal Trust and Other Earmarked Funds, GAO-01-199SP, January 2001. In the figure and the discussion that follows, all other programs, including these other earmarked trust fund programs, are grouped under “Other Government Accounts” to simplify the description and maintain the focus on Social Security and Medicare. (Back to Content)

4 There are six trustees: the Secretaries of the Treasury (managing trustee), Health and Human Services, and Labor; the Commissioner of the Social Security Administration; and two public trustees who are appointed by the President and confirmed by the Senate for a 4-year term. By law, the public trustees cannot be members of two different political parties. (Back to Content)

5 Congressional Budget Office, the Long-Term Budget Outlook, June 2011. (Back to Content)

6 Interest income is not a factor in this table as dollar amounts are in present value terms. (Back to Content)

7 The SMI Trust Fund has $81 billion of existing assets. (Back to Content)


Last Updated:  February 27, 2013