Medicare and Social Security to go bankrupt

A report on the Medicare system said that Medicare would become insolvent in 2019. This is seven years earlier than it was originally expected.

The trustees expect the Social Security retirement program to start running out of money in 2018 and be exhausted by 2042, the same as they forecast last year. ``The fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions,'' the trustees said in their annual report on the programs' solvency.

Several factors contributed to the deterioration in Medicare's finances. Hospital spending is rising faster than expected, while revenue growth has slowed because the sluggish economy has held down wages. Also, as part of legislation last year that will create a controversial prescription drug benefit under Medicare in 2006, President Bush and Congress increased Medicare payments for rural health providers and for managed-care plans that offer Medicare. The drug benefit itself doesn't technically add to Medicare's deficit because it's funded directly out of the federal budget. The deficit refers only to Medicare's hospital coverage, which is covered by the 2.9 percent payroll tax. Still, the drug benefit will add to Medicare's growing burden on the federal budget. Over the next 75 years, the benefit is projected to cost $8 trillion. "Serious as the issues are facing Social Security, the Medicare trustees' report reveals that the problems confronting the Medicare system are even greater," Treasury Secretary John Snow said at a news conference to release the projections. "The concerns that were laid out in the trustees' reports today demand the attention of America's policymakers and the attention of the general public." Both programs have built up sizable trust funds from recent surpluses, but the surpluses don't represent actual money that the government has on hand. Social Security and Medicare surpluses are held in Treasury bonds. So when the government needs to tap the surpluses, it must issue new debt or raise taxes to come up with cash.