'Til Death Do Us Part: The Intimate Relationship Between Social Security and Health Care Reform
The relationship between social security and health care reform is far more intimate than most of us realize. All told, Social Security, Medicare, and Medicaid provide a sweeping safety-net for the bulk of our nation’s Senior Citizens.
Until recently, many of us have naively clambered our way through working adulthood with some comfort that we too will have some financial security and well-being because of these programs… But--will we?
In February, the U.S. Congressional Budget Office (CBO) released a series of infographics illustrating the current status of our nation's finances.1 Who would have thought that such a sobering picture could be so artfully displayed? See these for yourself by clicking here.
At the top of the page, colorfully frosted doughnuts tell us our nation’s spending in 2016 exceeded revenue by $600 billion. At the bottom of the page, melted raspberry sorbet hills surge into a mountain telling us that the federal debt held by the public (you and me) has grown to its highest point since World War II. While the images are stunning to look upon, the underlying information would be more accurately portrayed with flashing amber and red lights signaling “CAUTION” and “DANGER AHEAD.”
The March publication of the CBO’s “2017 Long-Term Budget Outlook” trends the historic information used in the infographics into the future.2 The raspberry mountain of debt shoots straight-up like a rocket on its way to the moon. See below (“You are Here” added by me).
The bottom line for our nation is that without significant changes in law (whether it be tax reforms or spending reforms), the trajectory of financial imbalance is daunting and immediate (See “2017 Long-Term Budget Outlook.” Figure 2, page 6).
Intertwined at heart of this growing problem are the three largest domestic programs: Social Security, Medicare, and Medicaid. Together, these makeup over half of our nation’s expenditures.
According to pretty much anyone in official capacity (the Congressional Budget Office, the actuaries, and the Boards of Trustees) something must be done sooner rather than later to make these programs and our nation’s finances sustainable. Waiting is not a good option. If action is taken beginning in 2018, the CBO says we need $380 billion to maintain our current level of public debt. If we wait five years to take action, this amount grows by 82 percent. (See "2017 Long-Term Budget Outlook," page 24).
Every day between now and 2030, 10,000 baby boomers are turning age 65. What does this mean?
The demand for Social Security and Medicare benefits grows by 10,000 people each day.
The ratio of workers paying payroll taxes that feed Social Security & Medicare declines with each retirement.
Income taxes that provide the bulk of general revenue to run our federal government may also be at risk. This depends on boomers making withdrawals from deferred tax investments and how quickly newer middle-class workers move into higher tax brackets.
While publicly-funded health care costs are a concern and current reforms toward patient-centered care make sense, Medicare & Medicaid payment reforms alone are not likely to “fix” the big picture. On the other hand, changing Social Security benefits would create its own host of problems. So many seniors rely on this income to stay in their homes and to help pay for their Medicare Part B and Part D premiums. The service providers who deliver long-term care to low-income seniors also rely on these funds to help pay for food costs and the maintenance and repair on the physical buildings (see below for more information). Another risk of reducing Social Security benefits or delaying the age of eligibility is it will likely increase eligibility (and expenditures) for other low income programs such as Medicaid and supported housing.
Here are just a few key considerations for this discussion:
There are approximately 48 million adults age 65 and older in the United States today. This will grow to approximately 75 million within the next fifteen years.
Seniors often rely on all three programs simultaneously: It is not uncommon for an elderly individual to receive a social security benefit, Medicare coverage for acute medical care, and Medicaid coverage for long-term care services.
Of those ages 65 and older who receive social security income:
The average monthly benefit for the retiree is $1,360. The average monthly benefit for the retiree’s spouse is $790. Based on these average benefit levels, the annual incomes for most elderly couples are as follows:
35% of seniors rely on social security as 90% of their annual income which means their total annual income is around $28,600. 3
64% rely on social security for half of their annual income which means their total annual income is around $51,600. 3
Without Medicare, many seniors could not afford health insurance. While a couple with income between $28,600 - $51,600 would qualify for a tax credit under our current health care system, the upfront premiums and out-of-pocket expenses would be very challenging.
A mid-tier or “silver” health care plan has a premium of about $8,940 per year for a 60-year-old individual. The deductible for two people is about $6,500 and the portion of out-of-pocket expenses for medical is capped at just under $12,000 per year.
Medicaid covers services, such as personal care, for low-income seniors. This program helps keep an elderly individual safe, independent, and out of a restrictive (and costly) hospital environment. But neither Medicaid nor Medicare cover the costs of room and board when a low income senior needs to stay in a nursing home, assisted living center, or an adult family home. Instead, these costs are typically paid for with the individual’s Social Security benefit.
Social Security, Medicare, and Medicaid programs fall under the Social Security Act as “mandatory spending” meaning that eligibility and benefits are defined in law and cannot be changed without changing federal statute. Unlike Social Security which is paid directly to the beneficiary, Medicare and Medicaid are paid to contracted entities to provide the benefits to the beneficiaries. This is one of the reasons the focus is so heavily weighted on payment reforms to these publicly funded health care programs. Yet, one need only do a cursory review of the 2016 Annual Report of the Social Security and Medicare Boards of Trustees to see we have a problem that exceeds the boarders of publicly funded health care. In fact, in 2015, Medicare and Social Security together dipped into program reserves at the tune of $31.5 billion dollars. (Layperson's NOTE: "Reserves" are akin to my savings account. When my expenditures exceed my income, I must use money out of my savings to pay my bills. When my savings account is empty my reserves are depleted. At that point, if my expenditures exceed my income, I cannot pay my bills unless I take on new debt. At some point, I need to either make more money, get rid of some expenditures, or file bankruptcy).
A concise summary of the Trustee report can be found here, but the following information really stood out to me:
Social Security represents 25% of our nation’s $3.6 Trillion budget. It is currently funded by payroll taxes and has two components:
Old Age and Survivors Insurance (OASI) is the program that you pay into your entire career through payroll taxes. Then, depending on the number of working years, you receive a benefit at age 62 or older (benefits are reduced if you take them before age 65).
It is estimated that this program will begin to exceed its revenues at the end of 2019.
If the benefit levels and the payroll tax levels remain exactly as they currently are, the program’s reserves will run dry within the next 18 years. This is reduced to 10 years if Congress keeps borrowing revenue from this program to pay for Disability Insurance (see below).
Disability Insurance (DI) is collected from workers through payroll taxes. These funds are “held in a reserve” in case you become disabled while you are working. To qualify for this benefit, you must have worked and paid into the system for a certain period of time (5 years in many cases). This benefit is not provided to individuals unless they have met the required work credits.
The DI program’s expenditures began exceeding revenues in 2011. The definition of “disability” was broadened in 2008 and clarified in 2016.
In 2015, the DI program exceeded its revenue by $28 billion nearly depleting its reserves. The Bipartisan Budget Act of 2015 provided two years of increased revenue to this program, by moving revenue from Old Age and Survivors Insurance (OASI) to this program to postpone full depletion.
The Trustee’s report shows us that without a change in benefits or revenue, this program will run out of money in 6 years.
NOTE: A common mistake people make is to assume that this program pays benefits to people who have never worked. Another program called “Social Security Insurance” provides benefits to individuals with disabilities who have too few (or no) credits for working. SSI is paid for with general funds (income and corporate taxes), not from payroll taxes.
Medicare represents 17% of our nation’s budget. Medicare hospital coverage (Part A) is funded solely with payroll taxes. Medicare outpatient coverage (Part B) and drug coverage (Part D) are funded with user premiums combined with payroll taxes.
Medicare Part A dipped into its reserves by $3.5 billion in 2015. Under current payroll taxes and benefits, this program is projected to go bankrupt in roughly 11 years. There are currently many payment reforms and demonstration projects in progress that are attempting to reduce the cost of health care and bend the cost curve on this program.
The Medicare Part B and D programs broke even and we actually saw a slight increase in reserves in 2015. With this program, the recipient's premiums can be adjusted upward to help revenues meet expenditures. However, given that most seniors rely so heavily on social security as part of their fixed income, social security typically gets a cost of living adjustment to help seniors when their health premiums and other costs go up.
Medicaid represents 10% of our nation’s budget. It is paid for in partnership with federal general funds (income & corporate taxes) and with dollars provided by the states. It does not have federal reserves like Social Security and Medicare.
Beginning in 2014, many states opted to expand Medicaid coverage under the Affordable Care Act. The goal was to get more people into preventative care earlier. The idea was this would, in-turn, lower expensive health care costs due to things like emergency room visits that could have been prevented had the individual had access to clinics and earlier interventions. As part of this program, the Federal government agreed to pay 100% of the costs for this expansion until 2020, at which time they would phase down to 90%. Thirty-two states participated in the program.
The Medicaid expansion enrollment was nearly 50% higher than anticipated. Counter to the hope that overall health costs would go down, the actuaries found that the cost per Medicaid enrollee was 4% higher than prior to the expansion. This could have been due to pent-up demand for health care from previously uninsured individuals, but it remains to be seen if the Medicaid per person costs go down. Needless-to-say, the federal government is trying to figure out how to pay for this expansion long-term (as are many states) . Over the next eight years, the actuaries expect federal Medicaid outlays to increase by 63% to about $590 billion in federal funds (see page 11 in the in the “2016 Actuarial Report”.4 The American Academy of Actuaries provided feedback to congress in a letter on March 22, 2017 related to setting caps (or potentially setting up block grants) on federal funds provided to states for Medicaid.5
Conclusion: Change must come, whether it is tax reform or spending reform. Reforming health care payments alone will not likely solve the financial situation we find ourselves in. Social Security, Medicare, and Medicaid make up over half of our nation’s budget. These programs are intertwined and together, they provide stability to most of our nation’s seniors. While there are no easy answers, great care must be taken to understand how these programs work together to ensure we do not have the unintended consequences of reducing expenditures in one area which then increase expenditures in another.