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April 23, 2007
HP-367
Treasury Secretary Henry M. Paulson, Jr. Statement on the 2007 Social Security and Medicare Trust Fund Reports
WASHINGTON--The Social Security and Medicare Board of Trustees met this afternoon to complete their annual financial review of the programs and to transmit the Trustees Reports to Congress. I welcome my Cabinet colleagues and the Public Trustees, Tom Saving and John Palmer, two well-respected experts in their field. The nation is indeed fortunate to have your service.
For decades, Social Security and Medicare have provided vital support for Americans. As the baby boom generation moves into retirement, these programs face progressively larger financial challenges. If we do not take action soon to reform Social Security and Medicare, the coming demographic bulge will jeopardize the programs' ability to support people who depend on them. Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues, and threaten America's future prosperity. I urge my friends in Congress to join me in a bipartisan effort to strengthen both programs for future retirees.
This year's Social Security report again demonstrates that the Social Security program is financially unsustainable and requires reform. In just 10 years, cash flows are projected to turn negative, and the Trust Funds are projected to be exhausted in 2041. Reform is needed and time is of the essence. The longer we delay, the larger the required adjustments will be – and the burden of making those adjustments will fall more heavily on future generations.
Social Security's unfunded obligation - the difference between the present values of Social Security inflows and outflows less the existing trust fund - equals $4.7 trillion over the next 75 years and $13.6 trillion on a permanent basis. The actuarial imbalance expressed as a percent of taxable payroll is 1.95 percent over 75 years and 3.5 percent over the indefinite future. This means that, to make the system whole on a permanent basis, the combined payroll tax rate would have to be raised immediately by about one-third from 12.4 percent to about 15.9 percent, or benefits reduced immediately by 22 percent.
This report confirms the need for action; the sooner we take action to strengthen Social Security's financial footing, the less drastic the needed reforms will be. President Bush has called for solutions that generate a permanently sustainable Social Security system through bipartisan efforts. The President has put forward a number of well-considered ideas. And he has asked me to reach out to lawmakers in both parties and listen to all ideas. We need serious and thoughtful engagement from all sides to make sure Social Security is strengthened and sustained for future generations.
The 2007 Medicare Trustees Report shows even greater financial challenges. Medicare faces the same demographic trends as Social Security, and, in addition, the system must cope with large increases in health care costs.
Cash flow for the Hospital Insurance (HI) Trust Fund is projected to be negative this year and for all subsequent years. The HI Trust Fund is projected to become insolvent in 2019, one year later than projected in last year's report, and the 75-year estimated actuarial imbalance as a percent of payroll is 3.55, a slight deterioration from last year's report. On a permanent basis, the imbalance is unchanged at 5.8 percent of payroll.
The Supplementary Medical Insurance (SMI) Trust Fund, which includes Part B for outpatient services and the new Part D prescription drug benefit, is financed in large part by general revenues as well as beneficiary premiums. SMI expenditures are projected to increase rapidly, resulting in growing pressures on future federal budgets and, in turn, the U.S. economy. General revenue financing for SMI is expected to increase from about 1 percent of GDP in 2006 to nearly 5 percent in 2081.
Today, seniors all over America have guaranteed access to affordable prescription drug coverage. The market-based structure of the new prescription drug benefit appears to be working. Average premiums for Part D have come down this year.
The facts are clear: reforms to both Medicare and Social Security are urgently needed. The serious concerns raised by the Trustees Reports demand the attention of America's policymakers and the public. Americans who depend on Social Security and Medicare are relying on those of us in public to address the long-term funding issues. Successful long-term reform of these programs is a shared responsibility and we all have to rise to the challenge.
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