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Annual report delivers sobering news on Social Security, Medicare

Just in time for the upcoming anniversary of the Social Security Act of 1935, enacted Aug. 14 of that year, the 2017 Annual Report of the Social Security and Medicare Board Trustees is out; and, once again, the news is sobering.

According to a summary of the report, “Both Social Security and Medicare face long-term financing shortfalls under currently scheduled benefits and financing.” Additionally, the debate over health care has put Medicaid in the spotlight, so it’s time for a Q&A on three of the largest components of the federal budget, which account for about $2.4 trillion of spending.

How is Social Security funded?

It’s a pay-as-you-go system, funded by payroll taxes (the FICA line item you see on your pay stub). Every employee (and employer) pays a 6.2 percent tax on earnings up to a limit, which is currently $127,200. If you are self-employed, you have to pay as both the employer and the employee, for a total of 12.4 percent.

Where does the money go?

There are two trust funds: one for retiree benefits (the “Old-Age and Survivors Insurance” or “OASI”) and one for disability insurance (DI). Decades ago, there were more people working than retired, which kept the plan fully operational and adequately funded. Then in 1977, Congress enacted a change in Social Security, which led to the government receiving more money from taxes than was necessary to fund future obligations, creating a surplus.

Is Social Security going broke?

No, but the surplus is getting drawn down, as the massive baby boomer generation retires. According to the 2017 Trustee report, the old-age fund will be depleted by 2035, matching last year’s projection. After that, the system would be able to pay 75 percent of promised benefits. That means that if you were expecting to get back $2,000 a month in retirement in 2035, your payout would shrink to $1,500.

The trustees project that the disability fund will be depleted by 2028, five years later than previously projected. After that, the payout would be 93 percent of promised benefits.

What is Medicare?

Medicare is the government’s health care plan for those over age 65 and for those who are permanently disabled. Medicare coverage has four different parts: Part A (hospital services and skilled nursing), Part B (doctor visits/outpatient services/lab work/preventive services), Part C (Medicare Advantage Plans or private insurance alternatives to Original Medicare Plans) and Part D (prescription drugs).

Is Medicare going broke?

The trustees project that Part A’s trust fund will be depleted by 2029, one year earlier than they projected last year. By 2029, Medicare Part A would only be able to pay out 88 percent of expected benefits. The big issue is the rising cost of health care. The trustees project that total Medicare costs will grow from about 3.6 percent of the gross domestic product, known as GDP, in 2016 to 5.6 percent of GDP by 2041, and will increase gradually thereafter to about 5.9 percent of GDP by 2091.

What is Medicaid?

It’s the country’s largest government health care program, covering about 20 percent (74 million) of all Americans, including low-income families, pregnant women, people with disabilities and those who need long-term care.

How is Medicaid currently funded?

It is a partnership between the federal government and the states, where each pays a portion of a patient’s bills, with no limit.

How much does Medicaid cost?

In fiscal year 2016 (Oct. 1, 2015, through Sept. 30, 2016), total Medicaid spending, including administrative costs, accounting adjustments and the U.S. Territories, was $574.2 billion, according to the Kaiser Family Foundation. Over the next 10 years, the government projects that Medicaid spending growth will average nearly 6 percent.

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