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Comparing Budgetary and Trust Fund Measures of the Outlook for Social Security and Medicare 1 (October 2003)

handle is hein.congrec/cbo8311 and id is 1 raw text is: Aseries of issue summaries from the Congressional Budget Office No. 10, OCTOBER 10, 2003 Comparing Budgetary and Trust Fund Measures of the Outlook for Soci'al Security and Medicare The most comprehensive view of the financial outlook for Social Security and Medicare comes from estimating the resources that the federal government would need to draw for the programs from the nation's economic output-that is, the share of gross domestic product (GDP) that they would consume. That type of measure is conventionally used for the federal budget as a whole. In contrast, the re- ports of the Social Security and Medicare trustees are re- quired by law to focus on the status of the trust fund ac- counts that the Treasury Department maintains for the programs and to indicate whether the Congress has granted them sufficient spending authority to cover their expected payments. The concepts employed in the trustees' assessments, such as trust fund reserves and actuarial balance, illuminate the pro- grams' accounting, but not the real economic resources they require. First, because the assessments are based on measures of income and spending that are effectively aver- aged over 75 years, they do not reveal the magnitude of the programs' rising resource requirements. Second, they treat transfers from the government's general fund to the trust funds and the reserves of the funds as resources to pay ben- efits. However, those transfers and fund reserves are simply the result of credits exchanged between Treasury accounts -and thus reflect the government's commitment to pay the benefits but not necessarily the means to do so. Although the trustees are required to focus on the status of the trust fund accounts and to base their conclusions on trust fund measures, in recent years they have increasingly brought attention to the growing impact of Social Security and Medicare on the economy. When the future resource requirements of the two programs are shown year by year as a share of GDP, they more than double by 2075, rising from 6.9 percent of GDP today to a projected 16 percent in 2075 (see Figure 1). In contrast, when shown using sum- marized trust fund measures, taxes for Social Security and th Hopta Inurance-HI) rtofMed-IcarewoulInee to be only one-fourth larger than currently scheduled to restore actuarial balance-an amount less than 2 percent of GDP, on average (see Figure 2). Furthermore, no imbalance is shown for the Supplementary Medical Insurance (SMI) part of Medicare, even though its costs are projected to rise from 1 percent of GDP today to 4 percent in 2075 and three-fourths of its financing is drawn from the Treasury')s general fund.' Presenting the financial implications of Social Security and Medicare as they are projected to change over time using the broadest financial denominator-their relative share of gross domestic product-allows for a fuller and more trans- parent view of their growing impact on the economy. What Trust Fund Measures Show When the Social Security and Hospital Insurance trust funds' total income over the following 75 years is estimated to be within 5 percent of their total expenditures, the funds are considered to be financially sound-or in close actuarial balance.2 Having reserves credited to the funds throughout 1. The Medicare program has two parts. Hospital Insurance, or Part A, helps pay for inpatient hospital care, home health care, skilled nurs- ing, and hospice care for the aged and disabled. Supplementary Medi- cal Insurance, or Part B, helps pay for physicians' services, outpatient hospital care, and other services. 2. The Social Security and Medicare trustees employ other tests of actu- arial balance, but the 75-year summary measure receives the most attention. They also provide supplementary estimates of the pro- grams' rising share of GDP, but their conclusions about actuarial balance stem primarily from summarized averages of the trust funds' income and expenditures. See Social Security Administration, The 2003 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds (March 17, 2003); and Centers for Medicare and Medicaid Services, The 2003 Annual Report of the Board of Trustees of the Federal Hosp ital Insurance and Federal Supplementary Medical Insurance Trust Funds (March 17,

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