Note 27. Statement of Social Insurance Disclosures

The Statement of Social Insurance (SOSI) presents the projected 75-year actuarial present value of the income and expenditures of the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds.  Future expenditures are expected to arise from the health care payment provisions specified in current law for current and future program participants and from associated administrative expenses.  Actuarial present values are computed on the basis of the intermediate set of assumptions specified in the Annual Report of the Board of Trustees.  These assumptions represent the Trustees’ best estimate of likely future economic, demographic, and healthcare-specific conditions.

Actuarial present values are computed as of the year shown and over the 75-year projection period beginning January 1 of that year.  They are calculated by discounting the future annual amounts of non-interest income and expenditures (including benefit payments as well as administrative expenses) at the projected average rates of interest credited to the HI trust fund.  HI income includes the portion of FICA and SECA payroll taxes allocated to the HI trust fund, the portion of Federal income taxes paid on Social Security benefits that is allocated to the HI trust fund, and receipts from fraud and abuse control activities.  SMI income includes premiums paid by, or on behalf of, beneficiaries and general revenue contributions made on behalf of beneficiaries.  Transfers from State governments are also included as income for Part D of SMI.  Since all major sources of income to the trust funds are reflected, the actuarial projections can be used to assess the financial condition of each trust fund.

Actuarial present values of estimated future income (excluding interest) and estimated future expenditures are presented for three different groups of participants: (1) current participants who have not yet attained eligibility age; (2) current participants who have attained eligibility age; and (3) new entrants, or those who are expected to become participants in the future.  Current participants are the “closed group” of individuals who are at least age 15 at the start of the projection period, and are participating in the program as either taxpayers, beneficiaries, or both.  Since the projection period consists of 75 years, the period covers virtually all of the current participants’ working and retirement years.

The SOSI sets forth, for each of these three groups, the projected actuarial present value of all future HI (Part A) and SMI (Parts B and D) expenditures and all future non-interest income for the next 75 years.  The SOSI also presents the net present value of future net cash flows for each fund, which is calculated by subtracting the actuarial present value of future expenditures from the actuarial present value of future income.  The existence of a large actuarial deficit for the HI trust fund indicates that, under these assumptions as to economic, demographic, and health cost trends for the future, HI income is expected to fall substantially short of expenditures over the next 75 years.  Neither Part B nor Part D of SMI has similar problems because each account is automatically in financial balance every year due to its financing mechanism.

In addition to the actuarial present value of estimated future excess of income (excluding interest) over expenditures, for the open group of participants, it is possible to make an analogous calculation for the “closed group” of participants.  The “closed group” of participants consists of those who, in the starting year of the projection period, have attained retirement eligibility age or have attained age 15 through 64.  In order to calculate the actuarial net present value of the excess of future income over future expenditures for the closed group, the actuarial present value of estimated future expenditures for or on behalf of current participants is subtracted from the actuarial present value of future income (excluding interest) for current participants.

Since its enactment in 1965, the Medicare program has experienced substantial variability in expenditure growth rates.  These different rates of growth have reflected new developments in the treatment of medical care, demographic factors affecting the relative number and average age of beneficiaries and covered workers, and numerous economic factors.  The future cost of Medicare will also be affected by further changes in these factors that are inherently uncertain.  Consequently, Medicare’s actual cost over time, especially for periods as long as 75 years, cannot be predicted with certainty and such actual cost could differ materially from the projections shown in the SOSI.  Moreover, these differences could affect the long-term sustainability of this social insurance program.

In order to make projections regarding the future financial status of the HI and SMI trust funds, various assumptions have to be made.  As stated previously, the estimates presented here are based on the assumption that the trust funds will continue to operate under current law.  In addition, the estimates depend on many economic, demographic, and healthcare-specific assumptions, including changes in per beneficiary health care cost, wages and the consumer price index (CPI), fertility rates, mortality rates, immigration rates, and interest rates.  In most cases, these assumptions vary from year to year during the first 5 to 30 years before reaching their ultimate values for the remainder of the 75‑year projection period.  The assumed growth rates for per beneficiary health care costs vary throughout the projection period.

The most significant underlying assumptions used in the projections of Medicare spending displayed in this section are included in the Table 1 below.  The assumptions underlying the 2007 SOSI actuarial projections are drawn from the Social Security and Medicare Trustees Reports for 2007.  Specific assumptions are made for each of the different types of service provided by the Medicare program (for example, hospital care and physician services).  These assumptions include changes in the payment rates, utilization, and intensity of each type of service.  The projected beneficiary cost increases summarized below reflect the overall impact of these more detailed assumptions.

The ultimate values of the above-specified assumptions used in determining the estimates for each of the five years presented in the Statement of Social Insurance are listed within table 2 below.  They are based on the intermediate assumptions of the respective Medicare Trustee Reports.

Part D Projections

In addition to the inherent variability that underlies the expenditure projections prepared for all parts of Medicare, the Part D program is new (having begun operations in January 2006), with very little actual program data currently available.  The actual 2006 and 2007 bid submissions by the private plans offering this coverage, together with preliminary data on beneficiary enrollment, has been used in the current projections.  Nevertheless, there remains a high level of uncertainty surrounding these cost projections, pending the availability of sufficient data on actual Part D expenditures to establish a trend baseline.

Hospice Benefits Mis-Posting

Beginning in May 2005, expenditures for certain Part A hospice benefits were posted to the Part B account of the SMI trust fund, rather than from the HI trust fund.  Correction of this mis-posting will increase Part A expenditures and reduce Part B expenditures in 2008 and later years, compared to the projections shown in the 2007 Medicare Trustees Report.  It will also result in adjustments to the HI and SMI trust funds to account for the misallocated hospice expenditures during fiscal years 2005 through 2007.  The present values displayed in the Statement of Social Insurance have been revised to include the estimated impact of correcting this mis-posting.  The impact on the Part A and Part B expenditure projections presented in the Statement of Social Insurance is roughly $465 billion over the entire 75-year period, equivalent to a 2.0-percent increase for Part A and a 2.5-percent decrease for Part B.  However, the change in Part A expenditures also resulted in a very slight change to the discount rates used to calculate all of the present values in the SOSI, thereby contributing to a further minor change in the present value amounts for Parts A, B, and D relative to the original Trustees Report projections.

Report Date: November 15, 2007

AFR Section II Links:

• Message from the Chief Financial Officer
• Office of Inspector General Transmittal
• Independent Auditor's Reports
• Financial Statements and Notes
• Required Supplementary Stewardship Information
• Required Supplementary Information