Tuesday, June 23, 2015

Social Security and Medicare Cost per Person - Update

My last post on Social Security and Medicare costs per person was published in 5/23/2011 and a great deal has happened since then, especially with the Affordable Care Act (ACA).  I am sure that this will become a hot topic during the Presidential campaign along with the Social Security Trust Fund.  So I thought it might be worth a look at the current status of both of these trust funds and also do some forecasting using the latest Federal Budget (2016) forecasts through 2020.

As before, I used The Federal Budget Package for 2016 published by The Office of Management and Budget as well as the Historical Tables.  All of this is easily found on The Government Publishing Office site.  When the 2016 budget was published, the 2015 fiscal years was nearly complete, so even though 2015 is shown as an estimate, I am treating it as a very good estimate which may not necessarily be the case from 2016 onward.  In addition to doing my own forecasting of the inflows, outflows and resulting Trust fund balances out to 2060, I also have converted the 2016 budget forecasted and historical Social Security and Medicare outflows to Outflow/Person using census forecasts for the population over 65.  This ratio is then forecasted out to 2060 but converted back to Total Outflow to determine the Trust Fund Balances out to 2060.  [Note:  The Social Security Trust fund I am forecasting includes the Disability Fund which is used by people under 65 but this fund is less than 10 of the Social Security Trust Fund.  Also, there are some people who do draw on Social Security before 65, which I will evaluate later in this post.  Likewise the Medicare Trust Fund is the combined total of the Hospital and Supplemental Funds.  Lastly, the ratios of money you paid in to what you will take out  for either SS or Medicare remains the same from the 5/23/2011 post].

Looking at Social Security first, remember that the payroll tax rates, which you see on your W-2, have not increased since 1992.  Prior to this date, the payroll tax rates had been increased about every two years.  Prior to 1992, the SS Trust Fund balance forecast was not in jeopardy but each year since 1992, the forecasts have become increasingly dismal.  Also remember that there is a cap on wages to which the SS tax rate is applied, which limits in the Trust Fund inflow.  Below is a graph of the OASDI Trust Fund 
Balance (Old Age and Survivors and Disability Insurance) out to 2060 under 4 different scenarios.



  1. The blue line is the result of taking the 2016 budget forecast growth rates on Inflow (taxes mostly) and Outflow (benefits paid), then calculating the resulting balance of the fund.  You see that it goes negative in 2032.
  2. The purple line represents what would happen if the cap on wages taxed was immediately removed in 2015, with all other assumptions the same as in #1.  This extends the life of the fund to 2052 assuming that benefits paid do NOT change.
  3. The red line is the result of taking the CAPPED wages from #2 but applying a payroll tax rate that would exist in 2015 if payroll taxes had continued to be raised every two years at their historical rate.  To note, this tax rate would save OASDI Trust fund even with CAPPED wages.
  4. The green line has the same assumption as #3, except that wages had never been capped and the tax rate had gone up every two years from 1992,  in line with the history prior to 1992.
As you can see, the solution to the OASDI Fund is to increase the payroll tax or significantly reduce benefits.  It seems removing the cap is really not a TAX INCREASE but would cause the wealthy to pay more of the load.  This would buy some time to figure more acceptable solutions…tax rate hike or benefit reductions.

I also tried to look at the OASDI Fund using the most favorable growth rates in Inflow and Outflow, to determine if "rose colored glasses" might tell us anything different.  The highest growth in Inflow (taxes) was from 1995 to 2014 at 4.1% compounded annually. The lowest growth in Outflow (benefits) was from 2009 to 2014 at 4.1% compounded annually.  Using these two growth rates the Fund goes negative in 2043!  The bad news is that the 2016 Budget Forecast for these growth rates is 3.5% for Inflow and 4.8% for Outflow which results in the Fund going negative 2032 (the blue line in the graph above). Finally, converting the Outflow to Outflow/Person and finding the lowest growth rate for this number, the lowest is from 2009 to 2014 at 1.5% compounded annually.  If this forecast were used along with over 65 population growth the OASDI Trust Fund would never go negative!  By the way, the average per person benefit in this scenario is $1,563 per month in 2015.

Thinking about all of this Inflow and Outflow made me think about my own decision: When do I start to take my SS benefits???  So, out with the excel spreadsheet. Using the benefit estimates from by Social Security Annual Statement for age 62, 66 and 70, I created a simple model.  I assumed my  benefits would increase at 2% per year starting whatever year I began taking them.  Here is what I found to be my total benefits paid to me:
                                     Start at 62                    Start at 66                   Start at 70

Live to 80                     $495,356                      $495,353                    $459,997

Live to 90                     $837,912                      $964,469                 $1,031,902

If taking these benefits early allowed me to not to draw this amount from any IRA's, there is an additional benefit of growth in the IRA which amounts to (at 5% growth) about another $40,000 in the 4 years from 62 to 66, which buys a few more years!  Therefore, I started taking by benefits at 62 since I don't have long life genes in my family and I wanted to get in while the Fund is still solvent.

Now on to Medicare.  Again, I did some forecasting using Inflow (taxes mostly) and Outflow (benefits) using different growth rates on these numbers.  In addition, I also converted Outflow to Outflow/Person and studied this growth rate in different periods of time.  Using these different forecasts, I determined the resulting Medicare Trust Fund balance which is graphed below.


  1. The dark blue line uses the growth rates calculated over the 20 years from 1995 to 2014 for both Inflow and Outflow/Person.  This goes slightly negative for 14 years and then recovers.
  2. The green line uses the growth rates calculated over the 6 years from 2009 to 2014 for both Inflow and Outflow/Person.  This scenario never yields a negative Fund balance.
  3. The light blue line uses the growth rates calculated from 2015 to 2020 in the Budget Forecast.  Here the Fund Balance never goes negative.
  4. The red line uses the 20 year growth rates from 1995 to 2014 on Inflow and Total Outflow.  This goes negative in 2032.
  5. The purple line uses the 6 year growth rates from 2009 to 2014 on Inflow and Total Outflow.  This goes negative in 2028.
  6. The orange line represents the 6 year Budget Forecast growth from 2015 to 2020 for Inflow and Outflow.  This forecast does not go negative.  
What is the big difference in the growth rates from 2015 to 2020 being forecasted by the government.  Might this be the impact on Medicare of the ACA that has been often discussed?  Lets look at growth in for Total Medicare Outflow in an exponential control chart.




As you can see, the growth rate in Medicare Outflow (and Outflow per Person) since 2012 is down to 1.7% (the number in the table just above the blue shaded number).  This includes 3 years of actuals and is a statistically significant change.  For reference, the growth from 1995 to 2011 was 7.3%.  I am sure the Government is glad to see the low numbers for 2012-2015 and is happy to forecast this into the future as a way of claiming success on ACA which was signed into law in March of 2010.  The first insurance sign ups began in October of 2013.  If these numbers hold up, it could be that the Trust Fund might live on after all.




Friday, February 27, 2015

Republicans Versus Democrats on Debt and Budget Elements

Since the "Great Recession" is over, Presidential campaigns are looming and Obama has submitted his final Budget, I have decided to update some past postings in which I have rated the Presidential terms (and Parties) since Kennedy.  As before, I have downloaded all the historical spending and forecasts from the 2016 Budget package.  These can be found on the Office of Management and Budget website.

Looking at the actual budget incremental numbers by year would clearly bias conclusions for the most recent Presidential terms since our economy is steadily growing.  Therefore, all of my analysis is based on the growth rate of budget numbers expressed as percent growth compounded annually for each Presidential term.  There are an equal number of terms for both Republicans and Democrats in my analysis with each party also having one 4 year term.  In addition, Kennedy/Johnson were combined into one 8 year term as was Nixon/Ford.  Since Obama has submitted the 2016 Budget, the 2015 budget is half over, so that estimate should be fairly close and I am using the 2016 estimate to round out his 8 year term.

Below is the graph for Obama's 8 year term and this same technique was used for all Presidential terms on each budget category.


The total Budget Outlays are graphed above, beginning in 1961 through 2020, with the last 6 years being budget estimates.  The statistics are calculated, in this example, from 2009 thru 2016 which will be Obama's 8 years.  You will notice some red boundaries on the graph, for this period, which reflect the bounds of expected variation in the annual Outlays.  This would let you know if there was "unusual" year among his 8.  Centered under the graph, is a table of statistics, including the Compound Annual Growth Rate (CAGR) of 1.5% which is just above the blue highlighted entry.  Therefore, during Obama's 8 years (1 1/2 are forecasted), Government spending has grown 1.5% each year, compounded.  You should be able to d-click on this graph to see a larger version.

This type of analysis was done for every Presidential Term on the following Budget categories:

  • Real GDP
  • Nominal GDP
  • Individual Income Tax Receipts
  • Payroll Tax Receipts (Social Security and Medicare)
  • Corporate Tax Receipts
  • Total Receipts
  • Total Outlays
  • Annual Deficit
  • Supplemental Spending (off budget - calculated by Total Debt - sum of deficits)
  • Total Debt at the end of the year.
I also calculated, for evaluation, three additional categories of Budget line growth minus GDP growth.  This would show if a budget item is growing faster (positive number) or slower (negative number) than the economy:
  • Total Receipt growth minus GDP growth
  • Total Outlay growth minus GDP growth
  • Total Debt growth minus GDP growth 
The table below summarizes these findings.



As I have done in the past, to evaluate each Term relative to the others, I have defined "Best" as Receipts with the highest growth rates and Outlays, Deficits, Supplementals and Debt with the lowest growth rates.  In short anything that makes the Debt fall.  In the table above, magenta color reflects the "Best" performance in each budget category.  Likewise, the orange color represents the "Worst" performance.  Any underlined number was found to be statistically different from all other results.  At the bottom of the table is the average growth for all Democratic terms and the average growth for all the Republican terms.

Below are my highlights from the table:
  1. Real GDP, which represents economic growth, grew 1% better for Dems.  Kennedy/Johnson had the highest growth at 5.4%
  2. Individual and Corporate Tax receipt growth was higher for Dems (6.1% and 2.1% respectively).  Could it be that HIGHER taxes yield HIGER economic growth???  Notice for Bush 1, who had the lowest growth rate in both Individual and Corporate Taxes, he also had the lowest Real GDP!
  3. Total Receipt growth was 3.6% higher for Dems which is likely due to both higher tax rates and higher economic growth.
  4. Total Outlay growth was 1%  for Republicans.  I thought they valued SMALLER government.
  5. Supplemental Spending was 20 times higher for Republicans!!  Reagan had the highest rate at 46.6%.
  6. Total Federal Debt grew 5% faster under Republicans!  Reagan had the highest Debt growth at 15.1% likely caused by the high Supplemental.  The only other term with double digit growth was Bush 1 at 11.8% when his Outlay growth was twice the Receipt growth.
Finally, to determine the Best and Worst Presidential Terms, I evaluated each of Budget Categories I listed earlier, eliminating GDP but keeping Real GDP.  I also included the 3 additional calculated categories bulleted above.

I assigned 2 points for the best growth rate in each category and 1 point for second best.  (There was a tie in one category).  Likewise I assigned -2 points for the worst growth rate and -1 point for second worst.  Finally I added up the scores for each Presidential Term.  Here are the results:



I was very surprised by these results as they are different than in my earlier post!  So I tried a different approach using only Real GDP and my 3 calculated categories which should have negated any inflation issues.  To my surprise again, the results were very much the same.  Carter dropped to 4th (inflation issues) and Reagan switched with Bush 1 for last place!

I know there are many ways to evaluate a Presidency, with historians having a strong say.  However, as a data monger, I am glad that I have some data analysis approaches to use as I begin to think about the upcoming election cycle and all the rhetoric.  Good luck to us all!