NCPA - National Center for Policy Analysis


September 16, 2008

The plight of the Social Security trust fund is well known.  Outflows are projected to exceed inflows beginning in 2017; without corrective action, the trust fund will be depleted by 2041. But the Medicare trust fund is in worse shape: Outflows will begin to exceed inflows this year!  And projections indicated that it will be exhausted by 2019, says the RAND Institute.

More worrisome still, these projections may actually understate the extent of Medicare's funding problems.  Health care costs have historically grown faster and less predictably than general inflation.  This means that the Medicare trust fund could expire even sooner than most economists are projecting and that modest adjustments to taxes or benefits will not bring the fund into balance, says RAND.

What has brought this double-barreled funding crisis?  According to RAND, two factors stand out:

  • First, Americans are living longer; men reaching retirement at age 65 today typically look forward to a further 17 years of retirement, compared with fewer than 13 years back in 1965.
  • The result is that retirees are receiving Social Security and Medicare benefits for far longer than the designers of the program ever envisioned.
  • But more important, the cost of health care has increased rapidly, thanks largely to the pace of technological innovation.

However, the two programs have been successful in that they have historically reduced poverty among seniors and provided cutting-edge medical technology to seniors.  The challenge for policymakers is to address the programs' financial problems while building on these gains.

Successful reforms will reflect this central insight: Social Security and Medicare have reinforced each other's benefits and now suffer form intertwined problems.  Reforms to one must, at the very least, take into account effects on the other, adds RAND.

Source: Melinda Beeuwkes Buntin and Susann Rohwedder, "The Aging Couple," RAND Review, Summer 2008.

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