The big news in the Social Security and Medicare trustees reports released this afternoon is the improvement in Medicare’s finances due to slowing health cost inflation. As a result, the Medicare Hospital Insurance Trust Fund is projected to remain solvent until 2030, four years later than projected last year. The projected HI Trust Fund’s 75-year shortfall is 0.87 percent of taxable payroll, down from 1.11 percent of payroll last year.

On the other hand, the trustees also assume the Medicare Sustainable Growth Rate formula will not take effect. Though Congress has overridden the legislated reduction in physician payment rates since 2003, it has also included provisions offsetting part or all of the cost to Medicare. Implicitly, the projections now assume the “doc fix” will no longer include such provisions, raising projected Medicare Part B costs by about 0.3 percentage points annually over the next 75 years.

The combined effect of these changes is a reduction in projected short- and medium-term costs and an increase in long-term costs. Last year, costs were projected to rise to 3.6, 5.8, and 6.5 percent of GDP in 2012, 2040 and 2087, respectively. This year, costs are projected to rise to 3.5, 5.6, and 6.9 percent of GDP in 2013, 2040 and 2088, respectively.

Social Security projections show little change from last year, with the combined old age and disability trust funds projected to remain solvent through 2033—the same as last year—and a modest increase in the long-term shortfall from 2.72 percent of taxable payroll last year to 2.88 percent of taxable payroll this year. The change in the valuation period—one fewer year of surplus and one more year of deficit—accounts for 0.6 percentage points of the decline. The rest is due to small changes in demographic and economic assumptions (such as a reduction in the inflation rate from 2.8 to 2.7 percent), methodological improvements, and the repeal of parts of the so-called Defense of Marriage Act.

Interestingly, the pattern of change is reversed from Medicare, with Social Security’s shorter-term costs projected to be somewhat higher and its longer-term costs projected to be somewhat lower than last year. The fact that Social Security’s long-term costs level off after the Baby Boomer retirement while Medicare’s continue to climb illustrates the smaller role played by aging compared to health cost inflation. As the trustees explain: “In later years, projected costs expressed as a share of GDP trend up slowly for Medicare and are relatively flat for Social Security, reflecting slower growth in per-beneficiary health care costs and very gradual population aging caused by increasing longevity.”

Though the trustees’ projections are not very different from those of the Congressional Budget Office, CBO has recently framed the challenge as an aging society rather than health cost inflation, as I explained in Friday’s blog post. Neither CBO nor the trustees emphasize the effect of wage stagnation, though both continue to assume wages will grow much more slowly than productivity.