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May 2007
by James C. Musser, ASBA Washington Representative

Official Washington is abuzz over the just released report of the Medicare Trustees. The media has not said much about it but the bottom line is that our retirement security system is completely insecure. The news from the Trustees is not for the weak-hearted and points toward the fast approaching need for major reforms to Medicare, which will face a severe financial crisis by 2016.

Medicare actually comes in two different pieces. The first piece, the Medicare Part A trust fund, primarily funds hospitals, skilled nursing facilities, hospice and certain types of home care. This part is often referred to as Hospital Insurance (HI). The second piece, the Medicare Parts B and D trust fund, pays physician fees, outpatient surgeries, some types of home health care and prescription drug benefits. This portion is usually referred to as Supplemental Medical Insurance (SMI). The Medicare Trustees oversee the financial health of both parts of the program and report annually to Congress on the health of the trust funds.

In 2006, the Trustees report indicates 36.3 million persons aged 65 or older and seven million disabled persons were covered by Medicare. The total benefits paid were $402 billion against $437 billion in income to the trust funds. The real problem is with the HI trust fund, which the Trustees say is “not adequately funded over the next ten years.” They further state, “From the beginning of 2007 to the end of 2016, the assets of the HI trust fund are projected to decrease from $305 billion to $221 billion, which would be less than the recommended minimum level of one year’s expenditures.” This pressure on the trust fund is largely the result of the huge wave of retiring Baby Boomers who will be making demands on Medicare in unprecedented numbers in the next ten years.

Under the law, the Trustees’ report triggers a “Medicare Funding Warning”, which requires the President of the United States to submit to Congress a legislative plan to address the problem. Congress is then required to consider the plan on an expedited basis but the law does not require Congress to take any specific action.

Congress, however, will feel the practical effects of the financial crunch in Medicare, as well as Social Security, soon enough. Last year, for the first time, Medicare and Social Security took in less revenue from their dedicated taxes than what they paid out. The bite was a relatively small 5.3% of federal income taxes but at the present rate of growth in these two programs in just over ten years they will consume more than 25% of the annual budget. Without a dramatic overhaul of both Medicare and Social Security, fully one-half of the federal budget will be dedicated to just these two programs by 2030, the expected mid-point of the Baby Boomer retirement wave. At the present rate of growth, by 2040 Medicare and Social Security alone would require two-thirds of the federal budget, leaving little to pay for roads, national defense, education and the myriad other functions required of the federal government.

To save Medicare and Social Security, Congress must enact reforms to control the growth of these programs. Some decision must be made on means-testing for benefits, increasing taxes, raising the retirement age, looking for private sector solutions or some combination of all of these. None of the answers will be easy but the options only become worse the longer Congress procrastinates.

Check back each month for the latest from our nation’s capital. ASBA will be closely monitoring all the issues affecting you and your family.

James C. Musser, Esq. is a legislative consultant based in Falls Church, Virginia. His reports are updated monthly.