Social Security, Medicare dwindling in recession

WASHINGTON " Social Security and Medicare are fading even faster under the weight of the recession, heading for insolvency years sooner than previously expected, the government warned Tuesday.

Medicare already is paying out more money than it receives, something that happened for the first time last year. And Social Security will be by 2016, a year sooner than had been projected, the trustees' annual report said.

Unless changes in Social Security are enacted, the retirement fund will be depleted in 2037, four years sooner than projected last year. The Medicare trust fund is in even worse shape. It is projected to become insolvent in 2017, two years earlier than expected.

More immediately, the trustees do not expect Social Security recipients to get cost-of-living increases in 2010 or 2011, something that hasn't happened since automatic adjustments were adopted in 1975. The Social Security Administration will set next year's cost-of-living adjustment in October, based on inflation over the previous year.

"We should neither be casual nor hysterical about the revised insolvency dates," Social Security Commissioner Michael Astrue said. "The Social Security system will weather this recession. However, the sooner we get on with the task of reforming the system, the easier it will be to make the tough choices."

The recession is hurting both funds, which are financed by payroll taxes. The U.S. has lost 5.7 million jobs since the recession began, meaning fewer payroll taxes are flowing into the funds. At the same time, aging baby boomers and rising health care costs are adding to expenditures.

The trust funds " which exist in paper form in a filing cabinet in Parkersburg, W.Va. " are bonds that are backed by the government's "full faith and credit" but not by any actual assets. That money has been spent over the years to fund other parts of government. To redeem the trust fund bonds, the government would have to borrow in public debt markets or raise taxes.

Treasury Secretary Timothy Geithner, the head of the trustees group, said reducing health care costs is the key to saving Medicare.

"The most effective entitlement reform measure will be a major health reform that helps bring down the growth rate of national health care spending," Geithner said.

President Barack Obama and Congress have been working to overhaul the health care system with the goal of increasing coverage and lowering costs. But there is no consensus on how to pay for it.

"This report underscores the urgency of action on comprehensive health care reform this year," said Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee. "As costs continue to rise, the Medicare program so important to so many American families is put in jeopardy."

Republicans agreed that health care reform is urgent, but they warned against creating another government-run system.

"When we can't afford the public health plan we have already, does it make sense to add more?" asked Sen. Chuck Grassley of Iowa, the top Republican on the Finance Committee.

House Republican leader John Boehner said the trustees report "confirms what we already knew: Our nation cannot afford to continue this reckless borrowing and spending spree."

Geithner said the Obama administration plans to tackle Social Security once it health care is addressed. The options for fixing Social Security are simpler than for Medicare, though just as politically daunting: either raise revenues or cut benefits.

Workers fund Social Security by a paying 6.2 percent payroll tax on the first $106,800 of their earned income. Employers match the payment. Increasing revenues could be accomplished by increasing the tax rate or increasing the amount of earnings that are taxed.

Workers can currently retire with full benefits at age 66. The retirement age is scheduled to gradually rise to 67 for those born in 1960 or later. One option for cutting benefits would be to raise the retirement age even further.