May 1, 2006
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Treasury Secretary John W. Snow Statement on the 2006 Social Security and Medicare Trust Fund Reports
Welcome to the Treasury Department. The Social Security and Medicare Board of Trustees met here 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 and esteemed experts in their field, appointed by the previous Administration and now recently reappointed. The nation is indeed fortunate to have your continued service.
The two programs form the basis of a looming fiscal crisis as the baby boom generation moves into retirement. If we do not take action soon to reform both Social Security and Medicare, the coming demographic bulge will drive Federal spending to unprecedented levels, consume nearly all projected federal revenues, and threaten the Nation's future prosperity. Current trends are clearly not sustainable. The President has shown his serious intent and foresight with his call in this year's State of the Union address for a bi-partisan panel on entitlement reform.
Let me first briefly highlight this year's Social Security report. It demonstrates, as we've known for some time, that the Social Security program continues to be seriously under-funded and financially unsustainable in the long run. Cash flows are projected to peak in 2008 and turn negative in 2017 -- the same dates as in last year's report. However, the Trust Funds are projected to be exhausted in 2040 – this is one year earlier than last year's report, due to revised assumptions reflecting the latest assessment of economic and demographic conditions.
The unfunded obligation, that is, the difference between the present values of Social Security inflows and outflows less the existing trust fund, is $4.6 trillion over the next 75 years and $13.4 trillion on a permanent basis. The actuarial imbalance expressed as a percent of taxable payroll is -2.02 percent over 75 years and -3.7 percent over the indefinite future. This means that taxes would have to be raised immediately about 1/3 above the present level (by 3.7 percentage points), or benefits reduced immediately by 22 percent, to make the system whole on a permanent basis.
This report confirms the wisdom of the President's call for action last year and his consistent message that the sooner we take action to shore up Social Security's finances, the less severe needed reforms will be. Each year that passes without reform makes the ultimate resolution more difficult and more unfair. As he called for in the State of the Union address, solutions that generate a permanently sustainable Social Security system will require bipartisan efforts. The President has put forward a number of well-considered ideas. Now we need serious and thoughtful engagement from all sides to make sure Social Security is strengthened and sustained for future generations.
Let me now offer a few words on the 2006 Medicare Trustees' Report, which reveals even greater and far reaching fiscal challenges. While Medicare faces the same demographic trends as Social Security, it is additionally burdened by steady large increases in underlying 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 2018, two years earlier than projected in last year's report, and the 75-year estimated actuarial imbalance as a percent of payroll is -3.51, a 0.42 percentage point deterioration from last year's report. This deterioration is due primarily to new evidence on program experience showing higher spending on hospital and other provider care. On a permanent basis, this 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 1.0 percent of GDP in 2005 to nearly 5.0 percent in 2080.
For the first time we are dealing with a report in which the new prescription drug benefit is in full effect. Giving seniors access to affordable prescription drug coverage corrected a serious flaw in the structure of Medicare.
There is some good news we are pleased to report on the prescription drug benefit. Premiums for Part D are sharply lower than projected. These lower premiums indicate that competition has driven down costs and highlight the value of the market-based structure of the program.
The new prescription drug benefit has been a success. Now, seniors all over America have guaranteed access to affordable prescription drug coverage. The deadline for enrollment in the program is May 15, and enrollment has so far exceeded the expectations the Administration put forward earlier this year. Moreover, the average cost of the premiums paid by seniors for 2006 is considerably lower than what the Trustees originally anticipated. As the May 15 deadline approaches, I want to strongly encourage seniors who have not done so already to enroll in this new program.
In recognizing the need to provide seniors with prescription drug benefits, Congress also recognized the critical importance of doing so in a fiscally responsible manner. With commendable foresight, Congress wisely included new cost containment provisions that can trigger a Congressional review of Medicare's finances. This year's report represents the first stage in that process -- when general revenues begin to exceed 45% of Medicare's total outlays. If this trend continues as expected, the Administration and Congress will need to consider ways to address Medicare's finances.
In closing, while we are pleased with the modernizing reforms that brought us the new prescription drug benefit, there is no escaping the reality that further reforms to both Medicare and Social Security need to be made. The serious concerns raised by the Trustees' Reports demand the attention of America's policymakers and the public. Those who depend on Social Security and Medicare urgently need the best efforts of those of us in public life and in the private sector to address the long-term funding issues. Successful long-term reform of these programs should be seen as a shared responsibility, and not as an opportunity to engage in short-term politics.
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