The 2010 Social Security and Medicare Trustees Report

Somewhat to my surprise the 2010 Social Security and Medicare Trustees Report was released today. It opens with this cheery message from Treasury Secretary Timothy Geithner:

The outlook for Medicare has improved substantially because of program changes made in the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA). Despite lower near-term revenues resulting from the economic recession, the Hospital Insurance (HI) Trust Fund is now expected to remain solvent until 2029, 12 years longer than was projected last year, and the 75-year HI financial shortfall has been reduced to 0.66 percent of taxable payroll from 3.88 percent in last year’s report. Nearly all of this improvement in HI finances is due to the ACA. The ACA is also expected to substantially reduce costs for the Medicare Supplementary Medical Insurance (SMI) program; projected program costs as a share of GDP over the next 75 years are down 23 percent relative to the costs projected for the 2009 report.

Much of the projected improvement in Medicare finances is due to a provision of the ACA that reduces payment updates for most Medicare goods and services other than physicians’ services and drugs by measured total economy multifactor productivity growth, which is projected to increase at a 1.1 percent annual rate on average. This provision is premised on the assumption that productivity growth in the health care sector can match that in the economy overall, rather than lag behind as has been the case in the past. This report notes that achieving this objective for long periods of time may prove difficult, and will probably require that payment and health care delivery systems be made more efficient than they are currently. To facilitate this outcome, the ACA establishes a broad program of research on innovative new delivery and payment models to improve the quality and cost-effectiveness of health care for Medicare — and, by extension, for the nation as a whole. The improvement in Medicare’s finances projected in this report highlights the importance of making every effort to make sure that ACA is successfully implemented. If health care efficiency cannot be substantially improved through productivity gains or other measures, then over time the statutory Medicare payment rates would become inadequate. In that situation, the payment update reductions might be suspended, in which case actual long-range costs would be larger than those projected under current law.

While the financial outlook for Medicare in this year’s report is substantially improved relative to last year, further reforms will be needed. It is expected that the HI Trust Fund balance will fall below one year’s projected expenditure beginning in 2012, which means the test for short-range financial adequacy is not met. And it is projected that SMI will continue to put increasing pressure on the federal budget and beneficiaries in the years ahead, though to a much lesser extent than was projected last year prior to the ACA. Over the next 75 years, SMI costs are expected to average 3.3 percent of GDP, which is 1.4 percentage points higher than the SMI cost share of GDP in 2009.

I’m still digesting the report. However, here are a few highlights:

• The Old Age and Survivor’s Insurance component of Social Security is about $100 billion in the black (this is the part that most people think of as Social Security). I thought this might go into the red this year. Looks like we’ve dodged a bullet.
• The Disability Insurance component of Social is in the red this year.
• The Hospital Insurance component of Medicare is in the red this year.
• The Supplementary Medical Insurance (Part B pays for doctors and outpatient services, Part D for prescription drugs) is very slightly in the black to the tune of about $16 billion.

What we need to worry about is that Social Security is likely to add to the deficit rather than reducing it (as it has for the last 30 years). That will happen unless its revenues rise substantially, which either means that more people are working or wages have gone up for people in the lower four income quintiles which doesn’t seem particularly likely for the foreseeable future. Without the tax increase bundled into ACA Medicare would have stayed more or less permanently in the red, too.

Now I’m going to see if I can ferret out their growth assumptions to see how rosy this scenario actually is.