The Summary of the 2018 Annual Reports on the fiscal state of the Social Security and Medicare programs is out. It contains significant news, most of it bad. It turns out ? surprise ? the long expected Medicare crisis is coming sooner than we were led to believe. It?s not going to wait until everyone alive today is safely dead and buried, but within the next few years. And it might even hit sooner than that.
Don’t think it doesn’t apply to you because you’re years away from needing it. It will affect the entire population, even young people.
Summary of the 2018 Annual Reports (for Social Security and Medicare)
If you?re not familiar with the Summary of the Annual Reports, it?s a statement of financial condition issued each year by the Social Security Administration. It reports the state of both revenues and expenditures for Social Security and Medicare. It also tracks the size and projected direction of the various trust funds set up for both plans back in the early 1980s.
The trust funds are considered critical because expenditures are growing faster than revenues. The trust funds are expected to make up the difference. But those funds are depleting quickly, and much faster than we were originally led to believe.
The 2018 report offered the following:
- Both Social Security and Medicare will experience cost growth substantially in excess of GDP growth through the mid-2030s.
- The Social Security trust funds will be depleted by 2034. The cost of the program is projected to exceed total income, including interest, in 2018 for the first time since the trust fund began in 1982.
- Medicare has two trust funds, one for Hospital Insurance (HI), and one for Supplementary Medical Insurance (SMI), which is for Medicare Part A for other medical services.
- The Medicare HI fund will be depleted by 2026 ? three years earlier than the 2017 report projected.
- The three-year reduction in the depletion projection is attributed to lower payroll taxes from lower wages for 2017 and lower levels of projected GDP, and higher HI expenditures than anticipated.
- The SMI trust fund is expected to remain adequately financed into the indefinite future.
- Total Medicare costs will grow from 3.7% of GDP in 2017, to 5.8% by 2038 which will be nearly equal to the 6.1% for Social Security.
- Once the HI trust fund is depleted in 2026, projected revenues are expected to cover 91% of projected program costs.
Why the Medicare Crisis Will Hit Sooner than 2026
As bad as those projections look, there?s every reason to believe the situation is even worse. It?s reasonable to assume a Medicare crisis will hit before 2026.
Here are the reasons why:
Recession. The Annual Reports don?t reveal their economic assumptions, but we can assume they?re based on continued economic growth. Considering the last recession ended (theoretically) in 2009, we?ve gone nine years without a downturn. That?s very unlikely to continue much longer. A recession will result in higher unemployment, lower tax revenues, and a faster drain down Medicare trust funds.
Exploding health care costs. Rapid growth in healthcare costs have become as normal as air and water. The Kaiser Family Foundation reports healthcare costs have grown by an average annual rate of 4.9% between 1991 in 2014. I didn?t find an assumed rate of healthcare cost inflation in the report, but you can rest assured it?s lower than 4.9%.
Rising federal deficits. One of the dirty little secrets of the federal budget process is that the annual federal budget deficit is reduced by surplus revenues from Social Security and Medicare. The Annual Reports disclose that as trust funds are sold to cover the cost of the two programs, the federal budget deficit will increase disproportionately. It will have implications for the economy, mostly negative.
Political paralysis. Politicians don?t want to touch Medicare, or even speak of it publicly ? other than to assure everyone that all is well. They won?t tell us the plan is unworkable. They?ll continue to get away with that until the Medicare trust fund is gone.
Given the above factors, and the acceleration of the trust fund depletion by three years in the 2018 report, it?s reasonable to assume that future Annual Reports will move the day of reckoning even closer.
The Usual ?Solutions? that Won?t Work
The annual report suggests replenishing the trust fund with one of three strategies:
- Increase taxes
- Cut benefits
- Use a combination of both
However, they also warn that unless action is taken immediately, any attempts to fix the problem will be more severe.
No politician wants to author a bill that will increase taxes, cut benefits, or both. The only possible time that might happen is when the crisis becomes obvious.
When politicians do finally take action, they usually come down on the side of increasing taxes. But since the crisis will likely occur with a recession, raising taxes could actually make the situation worse.
And the bigger issue ? the one that dooms all healthcare reform efforts ? is a complete lack of cost containment. If the solution is only to raise taxes, it?ll just be a question of time before the healthcare cost spiral will overwhelm those increases.
Politicians either don?t get, or won?t admit, the magnitude of the overall healthcare problem in America. Until they do, there can?t be a political solution.
The Medicare Crisis will be Part of a General Healthcare Crisis
Just as is the case with Social Security, there?s a belief in many quarters that the looming Medicare crisis is a problem all by itself. It isn?t. It?s part of a much bigger general healthcare crisis that?s affecting the entire country, not just retirees.
For example, in 2016 my family and my wife?s employer paid over $21,000 for health insurance premiums. We also had thousands of dollars in deductibles and co-pays. In 2017, my wife lost her job, and we went on COBRA. The premiums were $1,875 per month ? well above our house payment.
Our situation is hardly unique. Five years after the onset of the Affordable Care Act, 15.5% of working age Americans (ages 19 to 64) don?t have health insurance. That?s up from 12.7% in 2016.
When a recession hits, those numbers will skyrocket. After all, if you lose your job, you?ll almost certainly lose your health insurance. Especially with something like a COBRA payment of almost $2,000 per month.
The only question is will the Medicare crisis trigger a general healthcare crisis, or will it be the result of it? It?s all part of the same problem. The same runaway costs that are affecting Medicare are also overwhelming everyone else.
Compounding the problem is that there?s no public groundswell to demand political action.
But with healthcare eating up 18% of the economy, and projected to approach 20% by 2026, cost is clearly the problem, not a lack of funding.
The reality of healthcare in America is that no amount of funding will ever be enough.
How to Protect Ourselves from the Medicare/Healthcare Crisis
Perhaps because the healthcare situation is so enormous, and the options so limited, we all prefer to ignore it. Or maybe we assume a miracle will occur, and the political establishment will come up with a truly workable solution.
But if we?re concerned enough to take action, exactly what kind of action would that be?
I have some suggestions:
- Take whatever steps needed to improve or maintain your health. The likelihood of a partial or complete breakdown in the healthcare system is great enough that we should assume there may be a time without health insurance sometime in each of our futures.
- Look into Christian health sharing ministries (if you?re eligible). They?re not true health insurance, but they provide similar benefits at much lower cost. One worth checking out is MediShare, which also has a Medicare supplement. I?m thinking these sharing ministries may expand beyond faith groups to the general population, representing a ground-level solution to an intractable problem.
- As the situation continues to get worse, do what you must to maintain group insurance. For example, look into part-time jobs with health insurance. My family had that for nearly 3 years.
- Keep your eyes and ears open for new developments. The government may be incapable of action on this crisis, but when pushed hard enough, people usually find successful workarounds.
Once a recession hits, circumstances may begin to change quickly. It seems clear we?ve past the point of ?peak healthcare?, and an unraveling is coming. Healthcare has turned into a full-blown bubble, much like the stock and real estate markets do.
All bubbles eventually burst.
An Ironic Twist ? Why a Medicare Crisis May Not be a Disaster
The crisis phase of a Medicare/general healthcare collapse will be ugly,? but the problem can only be fixed through collapse.
That?s not an insane idea either. When systems become as bloated as healthcare is, they?re beyond repair. The only possible hope for true reform comes from crisis. It?s a process known as creative destruction.
Widespread health insurance, Medicare and Medicaid serve to increase the price spiral. They do that by lowering the cost of services to the population, which drives demand higher.
A good parallel is the way mortgages with 0% down payments, no income verification and acceptance of bad credit fueled the housing boom of the early 2000?s, that led to the Financial Meltdown.
The cost spiral in healthcare will only be broken when the funding mechanism melts down.
That?ll be a painful transition to be sure, but an absolutely necessary one. Current levels of healthcare spending can’t be sustained, let alone where they?re projected to go.
A collapse of the funding mechanism and the price structure will force a reset on the entire industry.
A period of crisis will be followed by reinstitution of various insurance systems. They may look a lot like what we have now, or they may be completely different – like health sharing ministries.
Once we get through the adjustment phase, healthcare is likely to become more affordable. It will never be cheap, due to the technology and expertise involved. But it can and should be cheaper than it is now.
Have you been following this Medicare story? Where do you think healthcare in general is heading? And how can we prepare?