Off the Charts Blog | Center on Budget and Policy Priorities

The House Budget Committee will consider two bills tomorrow that, contrary to their titles, would harm the congressional budget process.  The House passed similar bills last year, and we have previously explained how they would make budget estimates less transparent and less useful.

• The “Baseline Reform Act” (H.R. 1871) would require the Congressional Budget Office (CBO) and the Office of Management and Budget (OMB), in constructing budget baselines that project future funding levels, to assume that discretionary appropriations will remain frozen indefinitely, with no adjustment for inflation.  The bill would have no effect for 2014 through 2021, since the baseline for those years assumes that appropriations conform to the levels specified in the Budget Control Act of 2011.  Beyond 2021, though, the proposal would make projections of deficits and debt unrealistic and misleading, we explained last year.

• The “Pro-Growth Budgeting Act” (H.R. 1874) would require CBO to prepare “dynamic” estimates of the budgetary impact of major legislation.  Because the effects of tax and spending changes on the overall economy are highly uncertain, trying to include these factors in budget estimates would impair the credibility of the budget process, our 2012 report explained.

The Budget Committee may also soon consider a third budget process bill that would also have unfortunate consequences.

• The “Budget and Accounting Transparency Act” (H.R. 1872) would add an extra amount to the recorded budgetary cost of federal credit programs, beyond their actual cost to the government, to reflect what private lenders would charge if they issued the loans and loan guarantees.  We have updated our in-depth analysis of this proposal and have issued a new, shorter explanation.

Medicare has grown financially stronger in both the short and long term compared to last year, its trustees said in their annual report.

The trustees reported that Medicare’s Hospital Insurance (HI) trust fund will remain solvent — that is, able to pay 100 percent of the costs of the hospital insurance coverage that Medicare provides — through 2026.  At that point, the payroll taxes and other revenue for the trust fund will still be able to pay 87 percent of hospital insurance costs, as we explain in our updated analysis (see graph).

Policymakers will need to close this shortfall with additional revenues, program changes that slow the growth in costs, or most likely both.  But contrary to claims by some policymakers and pundits, Medicare will not go “bankrupt” or cease to operate after 2026 — as that term may suggest.

In fact, Medicare’s financial outlook has significantly improved, thanks to health reform. The trustees project that the HI trust fund will remain solvent nine years longer than before Congress enacted the Affordable Care Act.  The Medicare hospital insurance program faces a shortfall over the next 75 years equal to 1.11 percent of taxable payroll — that is, 1.11 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period.  This is much less than the 3.88 percent of payroll that the trustees estimated before health reform.

Medicare does face substantial long-term financial challenges, stemming from the aging of the population and the continued rise in costs throughout the U.S. health care system.  It is essential that policymakers take further steps to curb the growth of costs throughout the health care system as we learn more about how to do so effectively.  In the meantime, we can achieve some additional Medicare savings over the next ten years in ways that preserve its guarantee of health coverage and don’t raise the eligibility age or otherwise shift costs to vulnerable beneficiaries.

Click here for our analysis of the trustees’ report, and here to listen to the audio recording of our related media briefing.

Medicare’s trustees will issue their annual assessment of the program’s finances tomorrow.  Although we don’t know what the report will show, the public should expect the projections of Medicare’s financial health to vary from one year to the next.  That’s normal, and not a source of concern.

Friday’s report will reflect the relatively slow growth of Medicare in recent years.  Medicare spending per beneficiary in fiscal year 2012 rose by only 0.4 percent — well below the growth in gross domestic product (GDP) per capita.  Over the 2010-2012 period, Medicare spending per beneficiary grew at a 1.9 percent annual rate, while GDP per capita grew by 3.2 percent a year.  The trustees’ new projections may assume that some of this slowdown in cost growth will continue, as the Congressional Budget Office has done.

The recommendations of the most recent Medicare technical advisory panel may also alter the projections.  Every few years, the trustees appoint a group of outside experts to review the assumptions and methodology underlying the report.  The most recent panel issued its recommendations in December 2012.  Some of them would reduce projections of future costs, whereas others would increase them.

Last year’s trustees’ report projected that Medicare’s Hospital Insurance (HI) trust fund will remain solvent — that is, able to pay 100 percent of the hospital insurance coverage that Medicare provides — through 2024.  In the upcoming report, the projected year of insolvency may move a year or so closer or further away.  This does not mean that the program is facing “bankruptcy.” Even when the trust fund is projected for exhaustion, incoming payroll taxes and other revenues will be sufficient to continue paying nearly 90 percent of program costs.  Moreover, trustees’ reports have been projecting impending insolvency for four decades, but Medicare has always paid the benefits owed because Presidents and Congresses have taken steps to keep spending and resources in balance in the near term.

Readers should also remember that health reform (i.e., the Affordable Care Act) has significantly improved Medicare’s financial outlook.  The trustees reported last year that the Medicare hospital insurance program faces a shortfall over the next 75 years equal to 1.35 percent of taxable payroll — that is, 1.35 percent of the total amount of earnings that will be subject to the Medicare payroll tax over this period.  This is much less than the 3.88 percent of payroll tax that the trustees estimated before health reform.  If health reform were repealed, as the House of Representatives has repeatedly voted to do, HI would become insolvent about eight years earlier, and Medicare’s costs would be significantly higher and rise more rapidly in the years ahead.

You can find our analysis of last year’s report here, and our preview of the Social Security trustees’ report here.  We’ll be back tomorrow with our initial reaction to the new reports.

Health care cost growth has slowed substantially, as the latest projections from the Congressional Budget Office (CBO) make clear  Since late 2010, CBO has reduced its projection of cumulative Medicare and Medicaid spending over the 2011-2020 period by $900 billion (or nearly 10 percent over that period).

That date’s important because it was in late 2010 — and based on CBO’s August 2010 projections — when fiscal commission co-chairs Erskine Bowles and Alan Simpson issued their original budget proposal, which called for over $300 billion in Medicare cuts and nearly $60 billion in Medicaid savings through 2020. The original Bowles-Simpson proposal is often considered an appropriate benchmark for evaluating other deficit-reduction plans.

The figure below compares CBO’s Medicare and Medicaid projections from August 2010 with the projections that CBO released last week.  (The note to the figure explains adjustments that we have made to provide comparability.)  Medicaid spending is $311 billion lower, and Medicare outlays have come down by $590 billion — far more than the savings that Bowles-Simpson recommended.

No one knows how long this good news will continue.  Some analysts conclude that fundamental changes in the health care system are responsible for most of the slowdown in cost growth.  Others find that the recession is the primary factor, with systemic changes less important.

Even if cost growth remains moderate, however, Medicare and Medicaid spending will keep rising as more baby boomers become eligible for benefits.  Making the U.S. health care system more efficient thus remains a major budget challenge.

But CBO’s new projections provide further evidence that Medicare and Medicaid are not in crisis.  Responsible reforms, such as those in President Obama’s budget (which would produce $400 billion in health care entitlement savings in the next ten years and $1trillion in savings in the subsequent decade), can help restore fiscal responsibility without shifting costs to vulnerable beneficiaries or states.  There is no need for sweeping and misguided changes, such as establishing a per capita cap in Medicaid or raising the age of eligibility for Medicare.

Most future Social Security beneficiaries would experience a benefit cut averaging about 2 percent over the course of their retirement from the President’s proposal to adopt the chained Consumer Price Index (CPI) for computing Social Security’s cost-of-living adjustments, our brief report explains:

• For beneficiaries receiving an average benefit, the reduction would average 1-2 percent.

• For beneficiaries receiving smaller-than-average benefits, the reduction would be smaller, likely in the 0.5 percent to 1.5 percent range — except for beneficiaries poor enough to qualify also for Supplemental Security Income (SSI), who would be held harmless.

• For beneficiaries receiving higher-than-average benefits, the reduction would be larger, averaging 2 percent or slightly more.

The proposal includes features to mitigate its effects on low-income and older beneficiaries:  a benefit “bump” that phases in gradually between ages 76 and 85 (as well as a second increase between ages 95 and 104).  It also exempts means-tested programs — notably SSI for very poor seniors and people with disabilities — from the switch to the chained CPI.

The graph shows how the proposal would affect three illustrative future retirees. Shifting to the chained CPI would reduce annual cost-of-living adjustments (COLAs) by about 0.25 percentage points a year for all three, according to Congressional Budget Office projections.

The cumulative impact of this reduction would grow over time but would be offset by the benefit bumps beginning in a recipient’s 70s and 90s.

Current beneficiaries would suffer smaller losses than future beneficiaries at any given age.  Current beneficiaries now 69 or older receiving an average benefit would receive lower benefits than under current law for the first ten years, but generally would receive higher benefits than under current law in years after that.  After 15 years, the cumulative change in benefits for the average current beneficiary would be near zero.  Current beneficiaries receiving smaller-than-average benefits would come out ahead if they lived more than ten or 15 years.