Chicago Actuarial Association March 20, 2018 Workshops Financial Status Update of Social Security and Medicare Raymond D. Berry, ASA, EA, MAAA, MSPA

Social Security and Medicare Overview of Financial status Not covering Medicaid Not covering Supplemental Security Income (SSI) Views/comments are ONLY mine and not my employer's nor the Chicago Actuarial Association

Social Security and Medicare Presentation Goals Update you on financial status of both programs Encourage all actuaries to get involved: Discussion with peers and public Discussion with Congress Tough decisions are ahead Should make decisions now not when in a dire situation

Social Security and Medicare Background Programs are not insurance contracts Programs can and will be changed by Congress 1983 Social Security Amendments Increased retirement ages which lowered projected benefits Increased taxes to develop the trust fund

Medicare Overview Retiree medical plan - Mandatory (taxes) But not mandatory coverage (although almost everyone elects coverage) Age 65 and over only, some disabled, at least 10 years of taxes Generally same level of benefits for all retirees depending on coverage elected Some higher income retirees pay higher premiums

Medicare Benefits Part A – Hospital Insurance (inpatient) Part B – Medical Insurance (doctors and outpatient) Part C – Medicare Advantage – Private insurance for Parts A and B and often Part D (HMO) About 30% of beneficiaries Per beneficiary rate per Medicare Part D – Drug Coverage

Medicare Benefits - Continued Deductibles, copays, and limits Medicare covers very roughly 80% of medical claims No dental coverage No LTC Medigap Private Insurance – most beneficiaries

Medicare Benefits - Continued Part B premiums range from $134 a month to $428 a month for retiree income levels over $160,000 Part D premiums are based on plan but an additional amount up to $74 per month for retiree income levels over $160,000 Part C varies by coverage

Medicare Revenue HI – 1.45% of payroll – no cap 0.9% of wages over $200,000 ($250,000 for couple) 3.8% investment earnings tax for higher income workers General revenue for SMI

Medicare – Financial Status AAA summary of 2017 Trustees report: "Medicare's Financial Condition: Beyond Actuarial Balance" 2017 Trustees report: "Considerations of …reforms should not be delayed." "The Board recommends that Congress and the executive branch work closely together with a sense of urgency to address these challenges."

Medicare – Financial Status Office of the Actuary Paul Spitalnic – Chief Actuary 33 credentialed actuaries

Medicare – Financial Status HI (Part A) trust fund projected to be depleted in 2029 – then cover 88% of program costs Deficit is 0.64% of payroll Immediate 22% increase in payroll tax or immediate 14% decrease in expenditures, or "combo" to be in balance

Medicare – Financial Status Actual figures likely greater as above based on scheduled reductions in provider payments Deficit 1.76% of payroll Immediate 61% increase in payroll tax or immediate 31% decrease in expenditures, or "combo" to be in balance

Medicare – Financial Status - Continued SMI (Part B and D) About a quarter of cost covered through premiums Other three-fourths covered by general revenue Medicare costs (and healthcare cost in general) continue to rise faster than other cost and is a growing percentage of GDP Continued pressure on federal budget

Medicare – Proposals Many and complicated Voucher system Raise premiums and/or lower provider expenditures Raise eligibility age Lower eligibility age Revamp of our healthcare system

Social Security Mandatory defined benefit plan that pools some risks like other defined benefit plans Not welfare. Minimum periods of "contributing" Individual equity vs. social adequacy Includes retirement, disability, survivor, and spousal benefits Essentially pay-as-you-go system. Trust fund contains special issue government bonds.

Social Security Trust Fund Real assets of IOUs? Special issue government bonds, pay interest By law, Social Security cannot invest otherwise.

Social Security Retirement Benefits Based on average 35 years of indexed earnings. Progressive formula – relates to adequacy Available starting at 62, major advantages to delaying commencement to full retirement age, or even to age 70 Payable for life COLA

Social Security Retirement Benefits Average monthly retirement benefit about $1,400. Retirees: 23% of couples/43% of singles, Social Security is at least 90% of their retirement income Social Security is at least half of the retirement income of over 60% of retirees

Social Security Other Benefits Spousal: Up to 50% of spouse's benefit Disability: Full and permanent after minimum service Surviving: Includes under age children and spouse

Social Security Revenue FICA (taxes): 6.20% on earnings up to taxable wage $128,400 in 2018 Employer pays same amount Minor income based on taxable Social Security benefits in receipt

Social Security Office of the Actuary Stephen Goss – Chief Actuary 16 credentialed actuaries Statement of Actuarial Opinion

Social Security – Financial Status Issue In 1940 life expectancy at 65 was 14 years, now over 20 years Now 2.8 workers per beneficiary, projected to be 2.2 by 2035

Social Security – Financial Status Three annual projections (Trustee report – low-cost, high-cost, intermediate) Trust fund – projected to be depleted in 2034 Upon depletion only able to pay 77% of scheduled benefits Immediate increase of 2.76% (from 12.4% to 15.16%) of payroll tax or immediate 17% decrease in benefits being paid to be in balance

Social Security – Financial Status - Continued Actuarial deficit of 2.83% of payroll for actuarial balance Assumes a reserve equal to one year of benefit payments 2.76% assumes zero reserve at end of 75 years

Social Security – Financial Status - Continued Low cost assumes a surplus of 0.12% of payroll High cost assumes a deficit of 6.63% of payroll Both are "reasonable" estimates not absolute worse or absolute best Significant component of differences is real-wage growth compared to inflation

Social Security – Financial Status – Continued Other Projections Unfunded obligation in dollars Unfunded obligation for "infinity" many issues with this assumes current law remains unchanged But continued increases in longevity Other issues

Social Security – Proposals Reduce benefit levels or increase payroll tax rate or some combo Increase taxable wage base Change benefit formula Increase full retirement age Earnings sharing – eliminate spouse benefit Provide a minimum benefit Additional general revenue Individual accounts

Resources Keep Informed Social Security Administration (SSA.gov) Center for Medicare and Medicaid Services (cms.gov) Society of Actuaries (soa.org) American Academy of Actuaries (actuary.org) National Academy of Social Insurance (nasi.org)

Resources – Continued Read these each year! An Actuarial Perspective on the 2017 Social Security Trustees Report, http://www.actuary.org/files/publications/IB.SocSecTrustees.2017.pdf Medicare's Financial Condition: Beyond Actuarial Balance, http://www.actuary.org/files/publications/Medicare_Trustees_Report_071917.pdf

Contact Information Raymond D. Berry Consulting Actuary Grant Thornton LLP 171 N. Clark Street Chicago, IL 60601 312-602-8333 ray.berry@us.gt.com