Social Security Deficit Outlook Remains Unchanged

Philip Moeller

The doomsday clock for seniors was updated Friday with the release of the annual report on the condition of the Social Security and Medicare programs - the two most important benefits for most older Americans. The trustees for the programs projected that Social Security's trust funds would exhaust its reserves in 2033 - the same as last year's report - but the depletion date of the Medicare fund had been extended by two years to 2026, largely due to projected health savings from the Affordable Care Act.

Kathleen Sebelius, secretary of Health and Human Services, also said a more stable outlook for Medicare should mean there will be no increase in 2014 Medicare Part B premiums, which cover doctors' fees and other outpatient care. The 2013 Part B premium for most beneficiaries is $104.90 per month.

[Read: 10 Reasons Critical Illnesses Pose Retirement Risk.]

The annual updates have become a signal in recent years for renewed calls to reform the programs and either eliminate or greatly reduce their deficits - projected deficits for Social Security and actual red ink for Medicare. At the same time, there is mounting pressure to deal with the programs because the nation's retiring baby boomers will add to future spending, especially for Medicare, Medicaid and other federal health programs.

Friday's announcements provided better news than last year's reports. In its 2012 report, Social Security trustees said the program had moved three years closer - to 2033 from 2036 in the 2011 report - to being unable to pay all of its obligations. More ominously, the program's projected deficits reached their greatest level in 2012 since major Social Security reforms were enacted 30 years ago, and the year-to-year increase in the deficit was the program's second largest in any year since those reforms. Those cumulative deficits rose further last year, the trustees said Friday, rising to 2.72 percent of all wages, from 2.67 percent last year.

Social Security uses payroll taxes to raise money for separate trust funds for retirement and disability benefits. The disability fund is in much worse shape than the larger retirement fund and was forecast in both the 2013 and 2012 reports to fall short of being able to pay 100 percent of its claims in 2016. Congress could move funds from the healthier retirement fund into the disability fund, which it did in 1994. But without other changes to the program, such a move would hasten the larger fund's depletion.

By contrast, life of the Medicare trust fund has been extended by nine years since passage of Obamacare in 2010. However, that fund covers only the program's hospital charges (known as part A of Medicare). Payments for physician and outpatient services, drug coverage and Medicare Advantage insurance funding shortfalls come from public funds. And the long-term costs of those programs continue to rise.

Even before Friday's reports, efforts to reduce Social Security's deficits have sparked a contentious debate among the program's traditionally liberal and Democrat supporters. President Barack Obama's proposed federal budget includes a provision to use a new price index - the chained CPI - as the basis for calculating Social Security's annual cost-of-living adjustments.

[Read: How the Chained CPI Affects Social Security Payments.]

The change would reduce the annual cost-of-living adjustment by no more than a projected three-tenths of 1 percent, but it would close as much as a quarter of program's total long-term projected shortfall. Critics note, however, that the annual reduction, while small, would be repeated year after year. The result, some studies have shown, would be a cumulative cut in Social Security payments of about $1,000 a year for the oldest retirees.

The chained CPI change was one of the recommendations made in late 2010 by Obama's National Commission on Fiscal Responsibility and Reform. Its report was not approved by enough commission members to send it to Congress for formal consideration, but it remains a starting point for serious debate about overall federal spending, including Social Security finances.

The commission's report includes major Social Security proposals and the percentage of the program's long-term funding shortfall they would address. Some of the proposals would actually raise Social Security deficits, but the sum of all proposals would solve the problem. By law, the long-term health of Social Security is looked at over a 75-year period. The commission was headed by former Sen. Alan Simpson, R-Wyo., and Democrat Erskine Bowles, a former chief of staff to President Bill Clinton.

[Read: Don't Get 'Framed' When Claiming Social Security.]

Here are the Simpson-Bowles Social Security recommendations, and the percent of impact each would have on closing the program's projected deficits:

1. Gradually phase in progressive changes to the benefit formula that would reduce the size of future benefit increases, especially for higher-earning beneficiaries. Impact: 45 percent

2. Offer minimum benefit of 125 percent of poverty for an individual with 25 years of work, and index the minimum benefit level to wage growth. Impact: -8 percent

3. Index the program's normal and early retirement ages to longevity, resulting in them increasing by about one month every two years. Social Security would be required to create a "hardship exemption" program for people who cannot continue working past the age of 62 but who do not qualify for disability payments. Impact: 18 percent

4. Provide a benefit enhancement equal to 5 percent of the average benefits (spread out over five years) for individuals who have been eligible for benefits for 20 years. Impact: -8 percent

5. Gradually increase the taxable maximum for payroll taxes to cover 90 percent of wage earnings by the year 2050. Impact: 35 percent

6. Use the chained CPI to determine the annual COLA. Impact: 26 percent

7. Cover newly hired state and local workers beginning in the year 2020. Impact: 8 percent

The cumulative impact of these and other changes recommended by the commission would equal 112 percent of the projected Social Security shortfall at the time of its report in 2010.