by David Lawder

Last Updated: 2008-03-26 10:00:36 -0400 (Reuters Health)

WASHINGTON (Reuters) – Medicare spending is increasing so quickly that the president will be required to propose new benefit cuts or higher taxes, trustees for the U.S. senior citizen health care program said on Tuesday.

Medicare hospital insurance spending is forecast to exceed tax revenues for 2008 and all future years and the fund will be exhausted in 2019, the Medicare trustees said in their annual report.

Last year’s report also predicted the fund would run out of money in 2019, but the trustees now expect the depletion to occur somewhat earlier in that year.

Trustees for the Social Security retirement benefits system said their trust fund would be depleted by 2041, unchanged from a year ago, as lower economic growth projections were offset by higher assumed rates of immigration.

Sounding a familiar refrain, U.S. Treasury Secretary Henry Paulson said the "coming demographic bulge" of the soon-to-retire baby boom generation jeopardizes both programs’ ability to support older Americans.

"Reform is needed and time is of the essence," Paulson said in a statement. "The longer we delay, the larger the required adjustments will be and the more heavily the burden of those adjustments will fall on future generations."

The Medicare trustees’ report triggered a "funding warning" for the second consecutive year because the rate of projected growth by 2014 will exceed a legal limit.

The White House responded to last year’s funding warning in its fiscal 2009 budget plan by proposing to reduce Medicare spending by $12.8 billion over five years, drawing sharp criticism from Democrats in Congress.

The latest warning on funding would require the president to make new proposals for cuts in funding or benefits next year for the fiscal 2010 budget plan.

The report said Medicare could be brought back into actuarial balance by an immediate 122 percent increase in the payroll tax or by an immediate 51 percent cut in benefits, or a combination of the two.

Democrats called for efforts to stem the growth of health care costs through reforms that would lower the price of prescription drugs and improve preventive care.

Sen. Max Baucus, a Montana Democrat who chairs the Senate Finance Committee, pledged to "improve Social Security solvency first without cutting benefits or raising taxes."

He said this should include closing a $50 billion "gap" between payroll taxes legally owed and those actually paid.


Social Security will start spending more than it takes in in 2017, a date unchanged from the last year’s report. The trust fund’s depletion date is being maintained in the face of a slowing economy partly due to the impact of higher assumed immigration, according to the report.

For 2009, the Social Security report projects 800,000 to 1.2 million legal immigrants into the United States, compared with last year’s projections of 675,000 to 1.06 million immigrants for 2009.

The report contains forecasts of real gross domestic product growth of 2.3 percent for 2008 and 2.8 percent in 2009. This compares with the most recent Bush administration forecasts of 2.7 percent growth for 2008 and 3.1 percent for 2009.

A Treasury official said the trustees use different forecasts than those used by the White House budget office in making its semiannual economic growth projections that form the basis of its federal budget proposal.

The report said Social Security could be brought into actuarial balance over the next 75 years by raising payroll taxes by 14 percent or reducing benefits by 12 percent, or combining the two.

Paulson failed to gain much traction in discussions with Congress over the past year for Social Security reforms that would have included the establishment of private investment accounts. He called for "bipartisan solutions that will generate a permanently sustainable Social Security system".

(Reporting by David Lawder; Editing by Dan Grebler)

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