April 22, 2010
UNFUNDED LIABILITIES OF SOCIAL SECURITY AND MEDICARE
By: Emilee Mooney Scott, Legislative Fellow
You asked about the unfunded liabilities of the federal Social Security and Medicare programs (1) in total and (2) expressed as a dollar amount per household in the United States.
Both Medicare and Social Security provide benefits to people who are retired or disabled, funded by taxes on the earned income of current workers. In general, these taxes currently cover expenditures, and any surplus goes into each program's trust fund. The trust funds can then be used to make up the difference if a year's tax revenues do not cover expenditures.
Debate about the future of Social Security and Medicare centers around the fact that as the Baby Boomers retire, tax revenues will decrease and expenditures will increase. If program expenditures exceed tax revenues for too long, the trust fund will be depleted and the program will be insolvent (Congressional Budget Office). Both Medicare and Social Security have substantial unfunded liabilities, which are calculated by subtracting the value of future taxes and the trust fund balance from the value of future benefit payments.
The figures in this report come from two publications: The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (2009 Social Security Trustees' Report) and The 2009 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds (2009 Medicare Trustees' Report). Figures are presented as the net present value (NPV) of future deficits, which compares the value of a dollar today to the value of a dollar in the future, based on expected inflation and interest rates. The Social Security and Medicare trustees calculate the NPV of the programs (1) over the next 75 years and (2) if the programs were to continue forever (infinite time horizon).
According to the US Census Bureau, there were approximately 117.2 million households in the United States in 2009 (US Census Bureau, Table AVG1). The NPV of Social Security's unfunded liability over the next 75 years is $5.3 trillion, or approximately $45,000 per household (2009 Social Security Trustees Report, p. 61). The NPV of the unfunded liability over the infinite time horizon is $15.1 trillion, or approximately $129,000 per household (id. at 62).
Medicare has two main components, and the Medicare Trustees' Report tracks figures for them separately. Hospital Insurance (HI), or Medicare Part A, helps pay for medical care for the elderly and disabled. Supplementary Medical Insurance consists of Part B (care for the elderly and disabled who have voluntarily enrolled), Part C (private “Medicare Advantage” plans), and Part D (subsidies for prescription drugs). Due to the automatic funding of the other Medicare programs, the HI program is the only one with an unfunded liability. The NPV of the unfunded liability of HI over the next 75 years is $13.4 trillion, or approximately $114,000 per household (2009 Medicare Trustees Report, p. 69). The NPV of the unfunded liability of HI over the infinite time horizon is $36.4 trillion, or approximately $311,000 per household (id.).