Every year, the Trustees of Social Security and Medicare trust funds release reports to Congress on the current financial condition and projected financial outlook of these programs. The 2016 reports, released on June 22, 2016, project a small Social Security cost-of living adjustment (COLA) and Medicare premium increases for 2017, and discuss ongoing financial challenges.
Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security trust funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits. (Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) trust funds. However, these projections are theoretical, because the trusts are separate, and generally one program's taxes and reserves cannot be used to fund the other program.)
Medicare: There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).
Administration is projecting that beneficiaries will receive a small cost-of-living adjustment (COLA) of 0.2% for 2017.
Annual costs for the Medicare program have exceeded tax income annually since 2008, although the Trustees project slight surpluses in 2016 through 2020 before a return to deficits thereafter.
*Note: Medicare premium projections are based on the projected Social Security COLA. Consequently, premiums for 2017 may be significantly different once the final COLA is calculated in October.
Social Security and Medicare accounted for 41% of federal program expenditures in fiscal year 2015. These programs are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on the trust funds is also worsening as large numbers of baby boomers reach retirement age, Americans live longer, and health-care costs rise.
Both reports urge Congress to address the financial challenges facing these programs in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Some long-term Social Security reform proposals on the table are:
*You can view a combined summary of the 2016 Social Security and Medicare Trustees reports or a full copy of the Social Security report at www.ssa.gov. You can find the full Medicare report at www.cms.gov.
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