Secure Your Future

Annual update on the state of Social Security and Medicare

Apr 24, 2008 9:38 PM

In March, the Social Security and Medicare Trustees issued their annual report on the finances of the Social Security System and the finances of the Medicare Hospital Insurance Trust Fund (Medicare Part A). The report covers the near term and the outlook over the next 75 years.

Social Security

Social Security will cost more, largely because the number of older Americans will grow faster than the number of workers.

Baby boomers (those born between 1946 and 1964) begin to turn 62 this year and become eligible to collect Social Security. Life expectancy is increasing (the fastest growing age group in America is the age 80-and-over group). These two factors are giving rise to the call by some that “the sky is falling” and that in order to save Social Security we must privatize the system. Another attempt by conservatives to privatize was defeated in the Democrat-led Senate earlier this month.

The trustees’ report, which is based on a moderate set of assumptions, shows that the Social Security Trust Fund will continue to grow until 2026 when the reserves will equal more than $5.5 trillion. In 2008 alone, the fund will grow by $196 billion. The cost of administering the system is less than one percent. Today, many people opposed to privatization believe that the main reason the private sector wants to privatize Social Security is that similar funds in the private sector charge up to 20 percent or so to administer. That could mean huge profits for those who would administer and invest the funds.

The moderate assumptions indicate that in 2041 the Trust Fund will be exhausted. The income to the fund will be able to pay for 78 percent of promised benefits. Many highly qualified actuaries outside of the Social Security System believe that the assumptions used by the system trustees are too conservative and if the economy in the future performs the same way it has in the past the Social Security System is soundly funded for the required 75 year period - until 2083.

But what if the Social Security Trustees are correct? The system will be able to meet all of its obligations in the future until 2041 and 78 percent after that. This certainly doesn’t sound like an emergency. As a matter of fact, if the trustees are correct the long-range actuarial deficit is 1.7 percent of taxable payroll. This means that to close the gap solely with a tax increase the Social Security tax rate could be increased by 1.7 percent. This charge would raise the Social Security tax rate paid by employees (and matched by employers) by .85 percentage points, from 6.2 to 7.05 percent.

But no one at this time is calling for such a tax hike. The shortfall can be eliminated by tweaking the system in various ways such as:

• Invest the trust fund in a similar fashion to the way pension funds are invested in a broadly diversified asset allocation program, which will generate more income than a 100 percent Treasury Bond Portfolio.
• Raise the cap on how much of a person’s salary is subject to Social Security contributions. This affects only higher income earners.
• As life expectancy increases, raise the age at which full benefits are available. This is not a good idea for people who work in stressful or physically taxing employment.

These are just examples of how any shortfalls can be mitigated. If you have suggestions on how to close the projected 1.7 percent gap, let us know.

The UFT will be watching ongoing events and we will advocate for protecting Social Security as we know it for our members.

Medicare

A similar trustee’s report describes the financial condition of the Medicare Part A (Hospital Insurance) Fund. This report projects the fund will be depleted in 2019, at which time income will cover 78 percent of expenditures. Medicare spending has grown at about the same rate as spending for private health insurance and it is impossible to limit spending without slowing the growth of private health care costs or abandoning equal access to care for the aged and disabled.

Medicare Part A is funded primarily by payroll taxes on wages. Workers and employers each pay 1.45 percent of wages for a total of 2.9 percent. Unlike Social Security taxes which are not imposed on earnings above a cap ($102,000 for 2008), Medicare taxes are paid on a worker's entire earnings. Medicare Part B (medical) and Part D (prescription drugs) are funded by monthly premiums usually deducted from a person’s Social Security payments as well as general revenues.

Medicare Parts B and D are always adequately funded because beneficiary premiums and general revenue contributions are set annually to cover the expected costs. They are not studied in this report. However the rapid rate of growth in program costs will cause premium increases as well as greater contributions from general revenues. Health care costs must be brought under control.

There are no substantial changes in Medicare Part A’s financial outlook. The projected date of the depletion of the Trust Fund is the same as in last year’s report. The 75-year deficit has decreased slightly to 3.54 percent of taxable payroll.

The cost of medical care in the U.S. is rising more rapidly than the general inflation rate. Many people are studying methods to control medical costs. The UFT is working to find solutions so you can be assured that you will be able to “Secure Your Future.”

New Investment Choices

In-service Tier I/II members must act by June 1 to make investment election changes that will take effect in July.

Retired Tier I/II members as well as those with tax-deferred annuities must act by May 1 to make investment election changes.

In-service and deferred TDA account holders must act by June 1 to make investment election changes.

Please study carefully the materials you have or will receive at home from the Teachers’ Retirement System about the new programs.

Questions about the new investment choices can be answered by calling the TRS or UFT borough offices. See the numbers below.

“Secure your future” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877), www.trs.nyc.ny.us.