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Medicare, Social Security, and 75-year projections

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Snapshot for June 21, 2000

Medicare, Social Security, and 75-year projections
The Trustees of the Social Security and Medicare programs issue reports each year assessing the 75-year outlook for these programs. These reports generally show far less than 75 years of funding adequacy. The projected funding shortfall, even if 25 to 50 years in the future, has led to cries of alarm and calls for a fundamental restructuring of both Social Security and Medicare.

The adequacy and relevance of the assessment is seldom called into question. But even calculating useful “ballpark” projections extending 75 years into the future is nearly impossible. Consider the last five reports about Medicare.

In the most recent assessment issued in March 2000, the trust fund was projected to be depleted in 2023. And closing the 75-year funding shortfall required an estimated increase in the payroll tax of 1.21 percentage points. (The trustees measure the future shortfall in funding as the amount by which the payroll tax would need to rise to close the 75-year funding gap.) But just 4 years earlier in the 1996 report, the trust fund was projected to be depleted in 22 years earlier, in 2001, and the 75-year funding gap was estimated to be nearly four times as large, 4.52 percent of payroll. [See Table.] The main factor behind the improvements in the trust fund and the reduction in the shortfall was a series of relatively small adjustments made in the fees paid by Medicare to doctors, hospitals, nursing homes, health maintenance organizations (HMOs) and other providers.

Trustees’ 2000 Assessment of the Medicare Trust Fund

Year of Report Year of Trust Fund Depletion Increase in payroll tax needed for 75-year solvency (percentage points)
1996 2001 4.52
1997 2001 4.32
1998 2008 2.1
1999 2015 1.46
2000 2023 1.21

Source: Trustees of the Federal Hospital Insurance Trust Fund, Annual Reports, multiple years.

The history of the past five years illustrates that the 75-year projections can fluctuate widely and are extremely inaccurate predictors of the long-term health and viability of these programs. Moreover, the large impact of the adjustments made in Medicare in recent years provides ample evidence that additional small modifications will likely be sufficient to rein in Medicare spending. Fundamental restructuring of the program, such as converting Medicare insurance into a program of premium supports (vouchers), is not necessary.

[This Snapshot is the second in a series on Medicare; see also Snapshots for June 14, 2000 and June 28, 2000].

Check out the archive for past Economic Snapshots.

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