Monday, May 23, 2011

Social Security and Medicare Costs per Person

In my last post May 2nd, I took a look at the payroll tax rates and income cap effects on Medicare and Social Security.  Using much of this same data, I calculated a Social Security and Medicare Payout per Person, taking the "65 and over" population projections from the Census Bureau.  I had become curious when I read that over an average person's lifetime, they would pay into the Medicare System $150,000 but take from this same system over $450,000 for medical care.  This did not feel right to me, so I took out my Social Security Report to find that I and my employer had paid less than half of this amount, and I was in top 5% of wage earners!

Using the 2012 US Budget from the CBO, with history back to 1937, and the CBO budget projections from 2011 to 2016, I modeled the Trust Fund inflows, outflows, surplus/deficit and resulting Trust Fund Balance for the OASI (Social Security) and the HI and SMI Funds combined (Medicare).  I did not do any work with the Survivor Trust Fund as it is not paid out to exclusively to those over 65. I then analyzed all this data using best fit exponential growth lines to determine the Annual Compound Growth Rates, CAGR, for Inflow, Outflow and Per Person Outflow.

Social Security (OASI Trust Fund)


From 1990 to 2009, the OASI inflow grew at 5.3% CAGR.  Prior to this the compound growth was 13.1%.  This recent very low growth of inflow is consistent with the payroll tax rate being locked in 1992 which I discussed in my previous post.  The 2012 budget forecast for inflow is for a CAGR of 5.9%.


From 1990 to 2009, the OASI Outflow grew at only 4.4%.  Prior to this the growth rate was 18.8% and the forecast in the 2012 Budget is for CAGR of 5.8%.  However, I got curious about the growth of the outflow per person as this should be in line more with inflation rather than 4 and 5% numbers in the budget.





As you can see, the per person (over 65) outflow had a CAGR of 3.2% from 1990 to 2009.  Prior to this time, the per person outflow grew at 15.8% and the 2011 to 2016 forecast is for growth of 2.5%.  To note, the CBO Budget for 2011 and 2012 show only an increase of less than 1%  each year.  I bet you have not read this in the news!!

The total outflow can now be modeled past 2016 from the 2010 actual per person outflow inflated 2.5% per year then multiplied by the projected population from the Census Bureau for each year.  Using this modeled forecast, the OASI Trust Fund balance continues to grow past 2050, using an inflow growth of 5.9% which is the current CBO forecast.  Social Security does NOT run out.  The Trust Fund inlflow would have to shrink in growth to below 3.9% (outflow at 2.5%) for Trust Fund to run out in 2050.  In the previous 70+ years, the inlfow growth has never been this low!

Medicare (HI and SMI Trust Fund)


For Medicare, which began in 1966, the compounded growth rate of inflow to the Fund was 7.5% from 1990 to 2009.  Prior to this the CAGR was 16.4% and the CBO Forecast for 2011 to 2016 is 7.6%.  Again the effect of stable Payroll Tax Rates since 1992.


For Medicare outflow (spending), the 1990 to 2009 CAGR is 7.8% but does not fit so well as you can see.  The yellow marked year in the graph above is when outflow growth increase to 9.3%.  Prior to 1990, the CAGR was 16.4%.  The CBO Budget Forecast for 2011 to 2016 is for a compound growth of 6.6%.  Is this the effect of the Medicare Reform passed by Congress to slow the growth in Medicare spending?  But I was again curious about how this outflow spending growth looked when done on a per person over 65 basis.


For the 1990 to 2009 period, the per person CAGR is 6.5% compared to 7.8% when analyzed by total outflow.  Prior to 1990, the per person growth was 13.8% and the CBO 2012 Budget Forecast for 2011 to 2016 is 5.9%.  This is only a slight reduction in the forecast per person growth from the current growth due to the Medicare Reform Act.

Using the same modeling technique as was used for Social Security, taking the 2010 actual Medicare spending per person over 65, and then inflating it at the CBO Forecast rate, you can then calculate a new Total Medicare Spending using the Census Population Forecast.  However, under almost any possible growth rate scenarios, the Medicare Trust Funds run empty in 2017 or 2018.

Finally, I was able to take Mean Income Data per household and with the actual payroll taxes in effect in prior years, and calculate an "average person's" contribution to Social Security and Medicare from Payroll Tax and then from my modeling, how much the same "average person" recieves in benefits.  I made the assumption of a 45 year work life (1965 to 2010) and then a 20 year benefits span (2011 to 2030).  This average person:

Paid In to Social Security (includes employer portion):            $198,000
Takes Out of Social Security:                                               $400,000  (2 times what was paid in)
    
Paid In to Medicare (includes employer portion):                    $44,845
Takes Out of Medicare:                                                      $467,000   (10+ times what was paid in)

If Medicare did not exist, and current seniors had "invested" their paid in amount, they each would be rationing their privately acquired health care with lifetime caps.  Just because the Government was the "investor" or their insurance carrier, does not "free" seniors from the rationing of healthcare due to their limited financial resources.

Had Medicare been managed like Social Security, with a compound annual return 1.6%, seniors would be paid monthly for health care, for a total of about $88,000 over their lifetime and it could be spent however they please.  On the other hand, if Social Security had been managed like Medicare, whenever a senior wanted a new car (new knee) or an all inclusive vacataion (100 days of nursing care), they would get whatever they wanted, without a lifetime cap! 



   







Monday, May 2, 2011

"Democrats Deny Social Security’s Red Ink"- Going Deeper

A February 25th, 2011 article on FactCheck.Org titled "Democrats Deny Social Security's Red Ink is right on target, but I would like to dig a bit deeper into the causes of our current budget and debt problems as well as some solutions.  http://www.factcheck.org/2011/02/democrats-deny-social-securitys-red-ink/

As the article states, Social Security Expenditures exceeded Social Security Tax Receipts only in 2009 but the Medicare Spending exceeded its receipts back in 1975, only a few years after getting started as  the graphs below attest.  (Data is based on Congressional Budget Office, 2012 Budget)




Since 70% or more of the Medicare budget is spent on those over 65 as is Social Security, I decided to combine these two programs into a single number since the younger among us are those funding these programs for our forefathers!  The first thing this brought to mind, was the income cap on Social Security which does not exist for Medicare and their corresponding rates, seen below.


It is very clear that rates have remained unchanged since 1990, which is almost half of the time period covered by this graph from 1966 to 2016!  So, what would have happened had Congress continued to increase the payroll tax rates at the same increments as had been done for the previous 23 years.  In the case of Social Security, it would have been about 0.2% every two years (3.85% to 6.20% in 12 increases over 23 years); for Medicare, it would have been about .09% every two years (.35% to 1.4% in 8 increases over 23 years).  In addition to these changes, I also generated non-capped personal income from the Medicare receipts and tax rates which was then used to create the Social Security receipts from non-capped income.  To note, I ignored the tax rate reductions in 1984 - 1989 and for 2011 as these reductions were made up from the General Fund and it was not clear if this transfer was included in receipts.

All of these data were then graphed with all the different scenarios on the same graph.


Medicare / Social Security Spending is the light blue line with the current budget plan from the CBO as the dark blue line.  With the spending combined, these deficits began in 2002.  But the more obvious problem here is that the all the lines begin to diverge around 1992.  One reason this date is important is that the regular payroll tax rate increases that had been taken for the previous 23 years was DUE in 1992 but was not taken and has not been taken since.

So lets look at the different scenarios that I calculated from the CBO Budget Data (in all these cases, I used only receipts and spending, ignoring the effect of trust fund balance and interest):
  1. Remove the income cap from Social Security Payroll Tax.  This scenario is the red line in the graph and indicates that issues could have been delayed until 2008.  This would be considered a tax increase even at constant tax rates, but at least it would be focused on the top 20% of wage earners!
  2. Increase the payroll tax rates at the pre-1990 increments but keep Social Security income cap in place.  This is the green line in the graph and shows that there would be a dip in receipts coincident with the recession, but then recovers in 2012 to exceed spending.
  3. Same as #2, but with uncapped Social Security income.  This is the purple line on the graph and clearly stays ahead of the spending rates.
It is clear, that the politics changed in 1992, the beginning of the Clinton Administration, but this aversion to raising the payroll tax continued through every administration since.  This is just one more example of inaction by our government in leaving the problem for someone else.  If we are not paying more in taxes to prevent these problems and spending is not cut, we will just pay later with financial messes like the housing collapse, recession and equity market shrinkage.  I guess it is easier to blame the bankers than it is the politicians!

But what if the rates were raised next year?  Could this help at all?  Looking at the CBO estimate years of 2011 to 2016, the total Social Security/Medicare spending is projected to be $8.3 trillion.  The current budget shows the receipts over these same 6 years to be $5.8 trillion, a $2.5 trillion shortfall.  If however the Social Security and Medicare rates were increased to 8.2% and 2.35% respectively and increased every two years at .2% and .09% respectively, keeping the SS income cap, the 6 year total would be $8.3 trillion which is the same as spending so no new contribution to the debt would be seen.  If the SS income cap were removed, the 6 year total would be $10.3 trillion and some help to the debt might be realized.

But alas, taxes will likely not be raised or the cap removed, so we can look forward to changes that will even more painful to the citizens, but less painful to the politicians.