    [House Hearing, 112 Congress]
    [From the U.S. Government Publishing Office]

                         MEDICARE AND SOCIAL SECURITY:

                                THE FISCAL FACTS

    =======================================================================

                                    HEARING

                                   before the

                            COMMITTEE ON THE BUDGET

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED TWELFTH CONGRESS

                                 FIRST SESSION

                                   __________

                 HEARING HELD IN WASHINGTON, DC, JULY 13, 2011

                                   __________

                               Serial No. 112-13

                                   __________

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                    COMMITTEE ON THE BUDGET

                         PAUL RYAN, Wisconsin, Chairman
    SCOTT GARRETT, New Jersey            CHRIS VAN HOLLEN, Maryland,
    MICHAEL K. SIMPSON, Idaho              Ranking Minority Member
    JOHN CAMPBELL, California            ALLYSON Y. SCHWARTZ, Pennsylvania
    KEN CALVERT, California              MARCY KAPTUR, Ohio
    W. TODD AKIN, Missouri               LLOYD DOGGETT, Texas
    TOM COLE, Oklahoma                   EARL BLUMENAUER, Oregon
    TOM PRICE, Georgia                   BETTY McCOLLUM, Minnesota
    TOM McCLINTOCK, California           JOHN A. YARMUTH, Kentucky
    JASON CHAFFETZ, Utah                 BILL PASCRELL, Jr., New Jersey
    MARLIN A. STUTZMAN, Indiana          MICHAEL M. HONDA, California
    JAMES LANKFORD, Oklahoma             TIM RYAN, Ohio
    DIANE BLACK, Tennessee               DEBBIE WASSERMAN SCHULTZ, Florida
    REID J. RIBBLE, Wisconsin            GWEN MOORE, Wisconsin
    BILL FLORES, Texas                   KATHY CASTOR, Florida
    MICK MULVANEY, South Carolina        HEATH SHULER, North Carolina
    TIM HUELSKAMP, Kansas                PAUL TONKO, New York
    TODD C. YOUNG, Indiana               KAREN BASS, California
    JUSTIN AMASH, Michigan
    TODD ROKITA, Indiana
    FRANK C. GUINTA, New Hampshire
    ROB WOODALL, Georgia

                               Professional Staff

                         Austin Smythe, Staff Director
                    Thomas S. Kahn, Minority Staff Director

                                C O N T E N T S

                                                                       Page
    Hearing held in Washington, DC, July 13, 2011....................     1

        Hon. Paul Ryan, Chairman, Committee on the Budget............     1
            Prepared statement of....................................     2
        Hon. Chris Van Hollen, ranking minority member, Committee on
          the Budget.................................................     3
            Prepared statement of....................................     4
        Stephen C. Goss, Chief Actuary, Social Security
          Administration.............................................     5
            Prepared statement of....................................     7
        Richard S. Foster, F.S.A., Chief Actuary, Centers for
          Medicare & Medicaid Services...............................    16
            Prepared statement of....................................    17

                         MEDICARE AND SOCIAL SECURITY:
                                THE FISCAL FACTS

                                  ----------

                            WEDNESDAY, JULY 13, 2011

                              House of Representatives,
                                       Committee on the Budget,
                                                        Washington, DC.
        The committee met, pursuant to call, at 10:08 a.m. in room
    210, Cannon House Office Building, Hon. Paul Ryan [chairman of
    the committee] presiding.
        Present: Representatives Ryan, Campbell, Price, Lankford,
    Black, Huelskamp, Young, Guinta, Van Hollen, Schwartz, Doggett,
    Blumenauer, Pascrell, Wasserman Schultz, Castor, Tonko and
    Bass.
        Chairman Ryan. Hearing will come to order. I didn't mean to
    scare you there. We are ready to get started now.
        We thank the witnesses for coming. I will open with a brief
    comment and then turn it over to my partner here Mr. Van
    Hollen.
        Welcome to today's hearing focused on our critical health
    and retirement security programs, specifically Medicare and
    Social Security. Today we welcome Rick Foster, chief actuary at
    the Centers for Medicare & Medicaid Services. Rick remains
    among the Nation's foremost experts on health care policy, and
    we remain grateful for his nonpartisan analysis and for his
    returning to testify before this committee.
        It is good to see you again, Rick.
        We are also very fortunate to be joined by Stephen Goss,
    chief actuary for the Social Security Administration. Like
    Rick, Steve's analysis provides policymakers with an
    indispensable guide to the structural need for reforms.
        Steve, I've known you a long, long time. It is great to
    have you back. We appreciate your taking time out of your day
    to come and testify today.
        The failure of Washington to be honest about Medicare and
    Social Security and the Federal budget threatens the economic
    security of Americans. For too long policymakers have avoided
    the critical question on how the social insurance strategies of
    the 20th century can deliver on their promise of 21st century.
    It is just that simple.
        The House Budget Committee has devoted considerable energy
    to changing Washington's culture of irresponsibility. The
    American people deserve better than empty promises with respect
    to these important programs.
        Earlier this year we proposed, debated and advanced a plan
    that helps fulfill the mission of health and retirement
    security for all Americans. Our budget charts a path to lift
    the crushing burden of debt, to spur economic growth and job
    creation, and to fix these problems. It has been a source of
    urgently needed debate along with an occasional distortion or
    two.
        Both sides have engaged in the unfortunate weaponization of
    entitlement politics. It is bad for our political discourse, it
    hinders efforts at bipartisan solutions, and, most importantly,
    it actually threatens the health and well-being of society's
    most vulnerable who rely most importantly on these programs.
        We need a clean break from the politics of the past, and
    that begins with a shared consensus on the facts. So today's
    hearing is an effort to unpack the fiscal facts on Medicare and
    Social Security, two critical programs that represent a solemn
    commitment to America's seniors. This is a commitment that
    cannot be kept unless reforms are made. To help us get our arms
    around the magnitude of these two programs' financial health, I
    can think of no better witnesses than the ones we have today.
        It is just this simple: These are the most important
    program of the Federal Government right here, these two.
    Millions of people rely on them. They are going bankrupt. They
    have to be reformed in order to be saved. And it is crystal
    clear to anybody who looks at these numbers that the sooner we
    act to shore these programs up, the better off everybody is
    going to be, the less disruption that occurs in the lives of
    the people who rely on them the most.
        You can't help but turn on the TV and see what is happening
    in Italy, in Greece, in Portugal, you name it. A debt crisis is
    on our horizon, and a debt crisis is driven in large part
    because of these programs. So it is so much better for us as
    leaders to act like leaders, and to fix this problem, and do it
    under our own terms and our own timeline before it gets out of
    our control. And it is just that simple. And so hopefully we
    can begin a conversation with the recitation of the fiscal
    facts as the nonpartisan trustees and actuaries display them.
        And with that I would like to turn it over to my colleague
    Mr. Van Hollen.
        [The prepared statement of Mr. Ryan follows:]

                Prepared Statement of Hon. Paul Ryan, Chairman,
                         House Committee on the Budget

        Welcome to today's hearing focused on our critical health and
    retirement security programs--specifically Medicare and Social
    Security.
        We welcome Rick Foster, Chief Actuary at the Centers for Medicare
    and Medicaid Services. Rick remains among the nation's foremost experts
    on health care policy, and we remain grateful for his nonpartisan
    analysis and for his returning to testify before this committee. We are
    also fortunate to be joined by Stephen Goss, Chief Actuary for the
    Social Security Administration. Like Rick, Stephen's analysis provides
    policymakers with an indispensible guide to the structural need for
    reforms. I thank you both for taking time out of your schedules to join
    us today.
        The failure of Washington to be honest about Medicare, Social
    Security, and the federal budget threatens the economic security of
    America's seniors. For too long, policymakers have avoided the critical
    question on how the social insurance strategies of the 20th century can
    deliver on their promise in the 21st century.
        The House Budget Committee has devoted considerable energy to
    changing Washington's culture of irresponsibility. The American people
    deserve better than empty promises with respect to these important
    programs. Earlier this year, we proposed, debated and advanced a plan
    that helps fulfill the mission of health and retirement security for
    all Americans. Our budget charts a path to lift the crushing burden of
    debt, and to spur economic growth and job creation. It has been a
    source of an urgently needed debate, along with an occasional
    distortion or two.
        Both sides have engaged in the unfortunate weaponization of
    entitlement politics. It is bad for our political discourse; it hinders
    efforts for bipartisan solutions; and most importantly it threatens the
    health and well-being of society's most vulnerable. We need a clean
    break from the politics of the past, and that begins with a shared
    consensus on the facts.
        Today's hearing is an effort to unpack the fiscal facts on Medicare
    and Social Security--two critical programs that represent a solemn
    commitment to America's seniors. This is a commitment that cannot be
    kept unless reforms are made.
        To help us get our arms around the magnitude of these two programs'
    financial health, I can think of no better witnesses than the two
    nonpartisan experts testifying before this committee today.
        Again, I thank you both for joining us today and look forward to
    your testimony. With that, I'd like to yield to Ranking Member Van
    Hollen for his opening statement.

        Mr. Van Hollen. I thank you, Mr. Chairman.
        I want to join the chairman in welcoming our witnesses
    today. I look forward to your testimony on what is a very
    important subject. I would note, Mr. Chairman, that this will
    be, I believe, the fourth hearing devoted to either Medicare or
    Social Security solvency, including yesterday's hearing where
    we had an extensive discussion of this issue with Secretary
    Sebelius and other witnesses, and I think that is entirely
    appropriate. But I want to note that we have not yet had a
    single hearing devoted to the issue of tax expenditures and
    revenue. And we all know that the President's bipartisan fiscal
    commission on which you serve, Mr. Chairman, said that you can
    look at the tax expenditures in the Tax Code and find about $1
    trillion every year.
        Chairman Ryan. We are working on scheduling that hearing.
        Mr. Van Hollen. Okay. We have had four on this issue, and,
    again, we should have many more this issue, but we have not yet
    had one on a hugely important part of our budget.
        There is no doubt that we need to make reforms in Medicare
    and Social Security to ensure the long-term strength and
    viability of those programs. We have very different views on
    how to do.
        But, Mr. Chairman, if we are talking about the facts, let
    us also be clear about this point. The Congressional Budget
    Office analysis shows that the primary recent policy decision
    driving the need to raise the debt ceiling was the decisions in
    2001 and 2003 to provide tax breaks that disproportionately
    benefited the very wealthy. That is what driving the current
    debt ceiling. We are talking about bills, past bills due and
    our ability to pay for those past bill dues.
        And as we all know, we have a very important conversation
    going on as to whether and how we take a balanced approach to
    that decision, one that includes important and difficult cuts
    in discretionary spending, one that looks at mandatory
    programs, one that looks at some of the things we can do to
    strengthen Medicare. Again, we have different views on how to
    do that. But one that we would urge also includes closing
    corporate tax loopholes and dealing with tax preferences for
    the folks at the very top.
        So again, I am glad we are having what by our account is
    the fourth hearing on this subject, but if we are going to take
    a balanced approach to the long-term challenges, let us include
    that conversation about tax expenditures.
        Now, with respect to Medicare and Social Security, again,
    we heard a lot of testimony yesterday from Secretary Sebelius
    and others. We believe we have to make very important reforms
    to Medicare. We believe we have to change the incentive
    structure so that we reward value of care and quality of care
    over volume of care and quantity of care. And Secretary
    Sebelius talked about some of the important initiatives she is
    taking with respect to improved coordination of care for dual-
    eligibles, people on Medicare and Medicaid, people with a lot
    of chronic diseases where we spend a whole lot on the Medicare
    program. We need to look at those sorts of things. We are open
    to other ideas.
        What we are not open to is transferring all those costs
    simply to seniors on Medicare without dealing with the
    underlying costs driving the entire health care system; not
    just Medicare, but the entire health care system of which
    Medicare is a very important part.
        And so, yes, we do object to the approach that was taken in
    the Republican budget, which the CBO says will not decrease
    health care costs nationally, but actually increase total
    health care costs, and we push a lot bigger part of that burden
    onto Medicare beneficiaries.
        With respect to Social Security, we believe that reforms
    need to be made to make sure that we strength the solvency of
    Social Security beyond the year 2036, 2037. We all know that if
    we do nothing to act now, Social Security beneficiaries would
    get 78 cents approximately on the dollar, 75, 78 cents. Yes, we
    need to act sooner rather than later to address those issues.
    Again, we have differences of opinion on how best to do that,
    but no difference on the fact that we need to make sure we
    strengthen those programs.
        So we are in fundamental agreement that Medicare and Social
    Security require some reforms to be strengthened. We are in
    very big disagreement as to how to do it. And apparently we
    continue to be in a big disagreement over taking a balanced
    approach to the overall budget that says let us not make the
    kind of mistakes that we made that are actually driving the
    budget deficits at the particular moment. Let us deal with tax
    expenditures, let us close some of those corporate loopholes
    whether it is for the jets or for oil and gas companies, and
    let us look at the tax preferences for folks at the very high
    end of the income scale on tax rates.
        So, Mr. Chairman, again, I would like to have a lot more
    hearings on this particular issue, but I would like us also to
    address the very important issues of tax expenditures as part
    of an overall budget discussion.
        [The prepared statement of Mr. Van Hollen follows:]

     Prepared Statement of Hon. Chris Van Hollen, Ranking Minority Member,
                         House Committee on the Budget

        Thank you Mr. Chairman, and I want to thank our witnesses for
    joining us today, and I look forward to your testimony on what is a
    very important subject. I would note, Mr. Chairman, that this will be
    what I believe is the fourth hearing devoted to either Medicare or
    Social Security solvency, including yesterday's hearing where we had an
    extensive discussion on this issue with Secretary Sebelius and the
    other witnesses. And I think that's entirely appropriate. But I want to
    note that we have not yet had a single hearing devoted to the issue of
    tax expenditures and revenue. And we all know that the President's
    bipartisan fiscal commission, on which you served Mr. Chairman, said
    that you can look at the tax expenditures in the tax code and find
    about $1 trillion every year in savings. We have had four hearings on
    this issue, and we should have many more on this issue, but again--we
    have not yet had one on a hugely important part of our budget.
        There is no doubt that we need to make reforms in Medicare and
    Social Security to ensure the long term strength and viability of those
    programs, and we have very different views on how to do it. But, Mr.
    Chairman, if we're talking about the facts, let's also be clear about
    this point: the Congressional Budget Office (CBO) analysis shows the
    primary recent policy decision that is driving the need to raise the
    debt ceiling were the decisions in 2001 and 2003 to provide tax breaks
    that disproportionately benefit the very wealthy. That is what is
    driving the current debt ceiling debate. We're talking about bills--
    past bills due--and our ability to pay them. And as we all know, we
    have a very important conversation going on as to whether and how we
    take a balanced approach to that decision. One that includes important
    and difficult cuts in discretionary spending. One that looks at
    mandatory programs. One that looks at things we can do to strengthen
    Medicare, and again we have different views on how to do that. But one,
    that we would urge, also looks at closing corporate tax loopholes and
    dealing with tax preferences for the folks at the very top. So, again
    I'm glad we're having, by what our account is the fourth hearing on
    this subject, but if we're going to take a balanced approach to the
    long-term challenges let's include that conversation about tax
    expenditures.
        Now, with respect to Medicare and Social Security--again, we heard
    a lot of testimony yesterday from Secretary Sebelius and others. We
    believe that we have to make very important reforms to Medicare. We
    believe that we have to change the incentive structure so that we
    reward value of care and quality of care instead of volume of care and
    quantity of care. And Secretary Sebelius talked about some very
    important initiatives that she's taking with respect to improved
    coordination of care for dual-eligibles--people on Medicare and
    Medicaid, people with chronic diseases--where we send a whole lot of
    the Medicare program. We need to look at those sorts of things, and we
    are open to other ideas. What we are not open to is transferring all of
    those costs simply to seniors on Medicare without dealing with the
    underlying costs driving the entire healthcare system, not just
    Medicare, but the entire health care system of which Medicare is a very
    important part. And so yes, we do object to the approach that was taken
    in the Republican budget which the CBO says will not decrease health
    care costs, but actually increase total health care costs and push a
    much larger part of the cost burden onto Medicare beneficiaries.
        With respect to Social Security we believe that reforms need to be
    made to make sure that we strengthen the solvency of Social Security
    beyond the year 2036. We all know that if we do nothing to act now then
    Social Security beneficiaries would get 77 cents on the dollar that
    they were expecting to receive. Yes, we need to act sooner rather than
    later to address those issues. And again, we have differences of
    opinion on how best to do that, but we have no difference in opinion
    regarding the fact that we do indeed need to strengthen those programs.
        We are in fundamental agreement that Medicare and Social Security
    require some reforms so that we can strengthen them, but we have some
    very big differences as to how to do it. And apparently we continue to
    be in significant disagreement over taking a balanced approach to the
    overall budget, one that says `Let's not make the same kind of mistakes
    that we made which are now driving the budget deficits at this
    particular moment. Let's deal with tax expenditures. Let's close some
    of those corporate loopholes--whether it's for the jets or for the oil
    and gas companies. Let's look at the tax preferences for the folks at
    the very top of the income scale.' So, Mr. Chairman, again I'd like to
    have a lot more hearings on this particular issue, but I'd like also
    for us also to address the very important issue of tax expenditures as
    part of the overall budget discussion. Thank you.

        Chairman Ryan. The gentleman made his point very clearly.
    Why don't we begin with you, Steve, and then go to Rick. The
    floor is yours. Please turn your mic on.

     STATEMENTS OF STEPHEN C. GOSS, CHIEF ACTUARY, SOCIAL SECURITY
     ADMINISTRATION; AND RICHARD S. FOSTER, F.S.A., CHIEF ACTUARY,
                CENTERS FOR MEDICARE & MEDICAID SERVICES

                      STATEMENT OF STEPHEN C. GOSS

        Mr. Goss. Thank you very much, Chairman Ryan.
        Chairman Ryan. Turn your mic on.
        Mr. Goss. There we go.
        Chairman Ryan, ranking member Van Hollen, members of the
    committee, thank you very much for the opportunity to discuss
    with you today the fiscal status of these programs.
        The 2011 annual reports issued by the Board of Trustees on
    May 13 have clearly laid out the projected future costs and
    financing of these programs under current law and our best
    assessment of future economic and demographic conditions.
        We are at the beginning of a substantial and permanent
    shift in age distribution of our population. The drop in birth
    rates from the longtime average level of three children per
    woman through 1965 to just two children per woman since 1975
    is, in fact, responsible. By 2040, there will be only two
    workers for every Social Security beneficiary, down from three
    workers per beneficiary throughout the period 1975 to 2008. As
    a result the cost of Social Security will shift from 4.3
    percent of GDP in the period 1975 through 2008 to a stable
    level of 6 percent of GDP for 2040 and later. Scheduled tax
    revenue will remain at about 4.5 percent of GDP in the future.
    Program sustainability for Social Security, therefore, will
    depend on making a choice to either increase revenue by 33
    percent after 2035, reduce benefits by 25 percent after 2035,
    or some combination of these two changes.
        In the absence of legislation, the combined Social Security
    OASI and DI Trust Funds are projected to be exhausted in 2036
    in our latest reports, with only about 75 percent of presently
    scheduled benefits being payable thereafter through 2085. It is
    actually 77 percent right away in 2036. Projected trust fund
    exhaustion is now 1 year earlier than in the 2010 report
    largely because of lower mortality and net immigration and a
    slightly slower expected economic recovery since the prior
    report.
        Social Security total income, however, will continue to
    exceed expenditures, causing the trust fund assets to grow
    until 2023. But Social Security noninterest income is now
    expected to be permanently below cost starting 2010. This is 5
    years earlier than expected a year ago. Positive net cash flow
    that hadn't been projected at less than $10 billion for each
    year 2012 through 2014 in the 2010 trustees report has been
    replaced with projected negative cash flow of less than 20
    billion for each of these years in the current report, largely
    because of the economic recession having a slower recovery in
    our assumptions. While GDP grew 0.4 percent less in 2010 than
    expected a year ago, the average real earnings level of workers
    grew by 3.1 percent less for 2010.
        Social Security and other trust fund programs are subject
    to special constraints that do not exist for other Federal
    programs. The trust funds have no borrowing authority in and of
    themselves, so these programs must always maintain a positive
    cumulative net cash flow, a positive asset level.
        If trust fund assets were ever to become exhausted, payable
    benefits limited to the continuing revenue of the program. In
    the case of Social Security, only about 75 percent of scheduled
    benefits would be payable after 2035. Congress has always taken
    action in the past in order to prevent the precipitous drop in
    benefits that would be required if there were ever the
    exhaustion of a trust fund.
        Budget scoring convention presumes that Social Security
    shortfalls after any trust fund exhaustion that might occur
    would be made up with revenue from the general fund of the
    Treasury, requiring extensive borrowing from the public. In
    fact, the law would not permit this. If currently scheduled
    benefits are to be paid after 2035 for Social Security, the
    Congress will need to pass legislation providing more revenue.
    Graphs of the theoretical growth in the publicly held debt
    after trust fund exhaustion based on the presumption that full
    benefits would continue with additional revenue from the
    general fund of the Treasury may be impressive; however, the
    reality of a precipitous drop in benefits at trust fund
    exhaustion has actually proven historically to be a more
    certain motivation for congressional action.
        The total Federal debt subject to ceiling includes the
    amounts the Treasury has borrowed from and owes both directly
    to the public and indirectly to the public through the trust
    funds. In the absence of asset accumulation by the trust funds
    in the past, the Treasury would simply have to have needed to
    have borrowed that much more directly from the public. The
    total debt subject to ceiling, therefore, depends entirely on
    the net cash flows of all the Federal programs that do not have
    trust funds. Changes in Social Security income and spending do
    not and will not have a direct effect on the total debt subject
    to ceiling, but they certainly do on the publicly held debt.
        Again, thank you for the opportunity to come and talk to
    you today, and I will be happy to answer any questions.
        [The prepared statement of Mr. Goss follows:]

             Prepared Statement of Stephen C. Goss, Chief Actuary,
                         Social Security Administration

        Chairman Ryan, Ranking Member Van Hollen, members of the committee:
    thank you for the opportunity to discuss with you today the fiscal
    status of these programs. The 2011 Annual Reports issued by the Boards
    of Trustees on May 13 have clearly laid out the projected future cost
    and financing for these programs under current law and our best
    assessment of future economic and demographic conditions.
        We must consider two fundamental questions in developing any future
    changes for the Social Security and Medicare programs.
         The first relates to the level of cost for these programs
    in the national economy. This is simply a question of what we want from
    these programs and how much are we willing to pay. ``Program
    sustainability'' depends on our addressing both what we want and what
    we are willing to pay--and finding the balance that the American people
    desire.
         The second is whether scheduled financing is sufficient to
    pay the scheduled cost of these programs in the future. This is the
    ``Trust Fund solvency'' perspective and is the central focus of the
    annual reporting of the Trustees. The law requires that the Trustees
    report on the actuarial status of the Trust Funds.
        Let me first address Program Sustainability, which may best be
    considered by looking at the cost of these programs expressed as a
    percentage of Gross Domestic Product (GDP).

        In 2008, prior to the effects of the recent economic recession,
    Social Security expenditures were 4.3 percent of GDP and Medicare
    expenditures were 3.2 percent of GDP. Social Security expenditures were
    essentially stable at about 4.3 percent of GDP from 1975 through 2008.
    Medicare expenditures rose from 1 percent of GDP in 1975 to 3.2 percent
    in 2008. The cost of both programs as a percent of GDP rose temporarily
    in 2009 due to the economic recession.
        The fundamental Program Sustainability issue for these programs is
    illustrated by the projected future growth in cost as percent of GDP
    under the Trustees' intermediate assumptions. The cost of providing
    benefits scheduled in current law is projected to rise to about 6
    percent of GDP for each of these programs by 2040. Social Security cost
    increases by about one-third and Medicare cost nearly doubles. The
    Congress, on behalf of the American people you represent, will need to
    decide whether (a) we are willing to pay 12 percent of GDP to maintain
    currently scheduled benefits, or (b) we will accept lower benefits at
    lower cost.
         why is program cost projected to shift to a new level by 2040?
        The projected shift up in cost by 2040 for both programs is largely
    due to the aging of our population. The ``baby boomers'' born in 1946
    through 1965 will be moving from working age to retirement age during
    this period. However, the reason the population as a whole is aging is
    that birth rates dropped after 1965, leaving relatively fewer people
    entering the workforce just as the boomers are retiring. Lower birth
    rates are the cause of this substantial and permanent shift in the cost
    of Social Security as a percent of GDP from 2008 to 2040. Lower birth
    rates are also a large part of the cause for the increase in Medicare
    cost as a percent of GDP over the same period.
        The adjusted total fertility rate (TFR) dropped from a long-term
    historical average level of about 3 children per woman surviving to age
    10 to just 2 children per woman by 1975, and is expected to remain at
    this lower level. If birth rates had remained at around 3 children per
    woman after 1965, the cost of Social Security would not be shifting up
    in the future.

        This drop in birth rates fundamentally changes the age distribution
    of our population for the future, meaning more people at age 65 and
    over compared to the number at working age, 20-64. (The ratio of
    population age 65 and over to that aged 20-64 is referred to as the
    aged dependency ratio.) Improving life expectancy has a much more
    gradual effect on this ratio.

        The changing age distribution of the population directly affects
    the numbers of workers we will have for each beneficiary in the future.

        The timing of the level shift in the cost of these programs as
    percent of GDP and the timing of the increase in the ratio of aged to
    working age population is no coincidence.
                              trust fund solvency
        Solvency requires a positive level of assets in order to pay
    scheduled benefits. Unlike most other Federal programs, the ``trust
    fund'' programs have NO borrowing authority.

        If a trust fund becomes exhausted, expenditures are limited to
    current revenue. For the Social Security OASI and DI Trust Funds this
    is critical. Should the combined OASI and DI Trust Funds become
    exhausted in 2036, only \3/4\ths of scheduled benefits will be payable.

        This inability to borrow for the trust funds has forced
    congressional action in the past so that aggregate trust fund assets
    have always remained positive.

        OASDI Trust Fund assets that were about 5 percent of GDP in 1957
    declined to less than 1 percent of GDP by 1983, when the second of two
    major reforms was enacted to preserve solvency for the trust funds.
    Trust fund assets for OASI and DI have now risen to over 16 percent of
    GDP but will decline until exhaustion in 2036. Congressional action is
    needed again, before 2036, to maintain solvency for the OASDI Trust
    Funds.
        For years after 2036, we need to either (1) increase OASDI income
    by one-third, (2) reduce scheduled benefit cost by one-fourth, or (3)
    enact some combination of these changes. Enacting changes relatively
    soon, even if the changes were not implemented for some years into the
    future, would provide advance notice for those who will be affected,
    and would remove uncertainty about the solvency of the program for the
    future. The 1983 Social Security Amendments provide a good example.
    These amendments included an increase in the normal retirement age that
    did not begin to be implemented until 17 years after enactment.
       effects of social security on the federal budget and federal debt
        There are two important facts to note about budget accounting for
    these trust-fund programs.
         First, assets in the trust funds have been borrowed by the
    rest of the government in lieu of additional borrowing directly from
    the public. Publicly held debt, currently about $10 trillion, is lower
    than the total Federal debt of about $14 trillion solely due to the
    borrowing from the trust funds. If the trust funds had not run
    cumulative surpluses, loaning $4 trillion to the Treasury, then the
    General Fund would now have $14 trillion in publicly held debt. Social
    Security financial operations and assets thus have no direct effect on
    either on-budget operations or total Federal debt subject to the
    ceiling.
         Second, the budget scoring convention that reflects
    shortfalls in Social Security financing after the trust funds are
    exhausted is inconsistent with the law. Because the trust funds have no
    borrowing authority, financial shortfalls after trust fund exhaustion
    would not be met. Such shortfalls would not cause either the increase
    in unified budget expenditures or the increase in publicly held debt
    that are presumed under budget scoring convention.

        social security financial operations in the 2011 trustees report
        Total income for the combined OASI and DI Trust Funds, including
    interest, is projected to exceed program cost until 2023. Thereafter,
    the combined assets are projected to decline and become exhausted in
    2036. OASDI net cash flow--excluding interest, consistent with a
    unified budget perspective--turned negative in 2010 due to the recent
    recession and slow recovery.

        In the 2010 Trustees Report, a small positive net cash flow was
    projected for OASDI for 2012-14. Net cash flow in the 2011 report is
    projected at about $20 billion lower for each of these years due to
    slower economic recovery, principally due to lower levels of average
    real earnings for workers.

        While real GDP for 2010 was 0.4 percent below the projection in the
    2010 report, average real earnings turned out to be 3.1 percent lower
    than expected. For 2013, the 2011 report projects real GDP to be 1.6
    percent lower and average real earnings to be 1.9 percent lower than in
    the prior report.

        For the 2011 report, the Trustees assumed a slightly slower decline
    in the civilian unemployment rate, reaching the assumed ultimate
    average level of 5.5 percent by 2018.

        Beyond 2020, OASDI annual balances (non-interest income minus cost
    as a percent of taxable payroll) are projected to be slightly lower for
    the 2011 report reflecting (1) lower than expected recent death rates
    for those age 65 and over and (2) lower than expected net immigration.
    Changes in life expectancy and net immigration explain most of the
    increase in the long-range OASDI actuarial deficit from 1.92 percent of
    payroll in the 2010 report to 2.22 percent of payroll in the 2011
    report. These changes, along with the slower than expected economic
    recovery, resulted in projected trust fund exhaustion for 2036, one
    year earlier than was projected last year for the combined OASDI Trust
    Funds. The exhaustion date for the OASI Trust Fund is projected to be 2
    years earlier, in 2038. The projected exhaustion date for the DI Trust
    Fund is unchanged at 2018.

                                   conclusion
        We are at the beginning of a substantial and permanent shift in the
    age distribution of our population. The drop in birth rates from the
    long-time average level of about 3 children per woman through 1965, to
    just 2 children per woman since 1975, is responsible. By 2040, there
    will be only 2 workers for every OASDI beneficiary, down from 3 workers
    per beneficiary throughout the period 1975 through 2008. As a result,
    the cost of Social Security will shift from 4.3 percent of GDP in the
    period 1975 through 2008 to a stable level of 6 percent of GDP by 2040.
    Currently scheduled tax revenue will remain at about 4.5 percent of
    GDP. Program Sustainability will therefore require a choice to:
         Increase revenue by 33 percent after 2035,
         Reduce benefits by 25 percent after 2035, or
         Enact some combination of these changes
        In the absence of legislation, the combined OASDI Trust Funds are
    projected to become exhausted in 2036, with only 75 percent of
    presently scheduled benefits being payable thereafter through 2085.
    Projected trust fund exhaustion is now 1 year earlier than in the 2010
    report largely because of lower recent mortality and net immigration,
    and a slower than expected economic recovery.
        Social Security total income will continue to exceed expenditures,
    causing the trust fund assets to grow, until 2023. Social Security non-
    interest income is now expected to be permanently below program cost
    starting in 2010, 5 years earlier than expected a year ago. Positive
    net cash flow of less than $10 billion for each year 2012-2014
    projected in the 2010 Trustees Report has been replaced with projected
    negative net cash flow of less than $20 billion for each of these
    years. While real GDP grew 0.4 percent less in 2010 than expected a
    year ago, the average real earnings of workers grew by 3.1 percent
    less.
        Social Security and other trust fund programs are subject to a
    special constraint that does not exist for other Federal programs. The
    Trust Funds have no borrowing authority, so these programs must always
    maintain a positive cumulative net cash flow--a positive asset level.
        If trust fund assets were ever to become exhausted, payable
    benefits would be limited to the continuing revenue of the program. In
    the case of Social Security, only about 75 percent of scheduled
    benefits would be payable after 2035. Congress has always taken action
    in order to prevent the precipitous drop in benefits that would be
    required at exhaustion of a trust fund.
        Budget scoring convention presumes that Social Security shortfalls
    after trust fund exhaustion would be made up with revenue from the
    General Fund of the Treasury, requiring extensive borrowing from the
    public. In fact, the law would not permit this. If currently scheduled
    benefits are to be paid after 2035, the Congress will need to pass
    legislation providing more revenue. Graphs of the theoretical growth in
    publicly held debt after trust fund exhaustion based on the presumption
    that full benefits would continue with additional revenue from the
    General Fund of the Treasury may be impressive. However, the reality of
    a precipitous drop in benefits at trust fund exhaustion has actually
    proven to be a more certain motivation for Congressional action.
        The total Federal debt subject to ceiling includes the amounts the
    Treasury has borrowed and owes both directly to the public and
    indirectly to the public through the trust funds. In the absence of the
    actual asset accumulation by the trust funds, the Treasury would simply
    have needed to borrow that much more directly from the public. The
    total debt subject to ceiling therefore depends entirely on the net
    past cash flows of all of the Federal programs that do not have trust
    funds. Changes in Social Security income and spending do not and will
    not have a direct effect on the total debt subject to ceiling.
        Chairman Ryan, Ranking Member Van Hollen, and members of the
    committee, all in my office look forward to continued work with you and
    all members of the Congress in the development of legislation that will
    restore long-range sustainable solvency for the Social Security Trust
    Funds.

        Chairman Ryan. Mr. Foster.

                     STATEMENT OF RICHARD S. FOSTER

        Mr. Foster. Good morning, Chairman Ryan, Representative Van
    Hollen and distinguished committee members. Thank you all for
    inviting me to testify today about the financial outlook for
    the Medicare program. I am accompanied by Clare McFarland
    sitting behind me, who is the Deputy Director for Medicare and
    Medicaid----
        Chairman Ryan. Pull the mic a little closer.
        Mr. Foster. Sure. Clare McFarland, who is the Deputy
    Director for Medicare and Medicaid Cost Estimates in the Office
    of the Actuary.
        Now, as you know, the health care cost growth generally
    exceeds that for the economy at large. This happens because
    health care costs grow in proportion to the number of people
    who are covered; the general inflation in the economy, in
    addition excess medical-specific inflation above and beyond
    general; as well as increases in the volume and the intensity
    or the average complexity of services that are provided. In
    contrast, the gross domestic product increases with the number
    of workers, with general inflation again, and also roughly with
    productivity gains in the economy.
        Now, over the last 10 or 20 years, per capita health care
    cost growth has run about 1 to 2 percent faster than growth in
    the per capita GDP. As we look at Medicare specifically, over
    the last 10 years, the average annual increase in cost for
    Parts A and B combined of Medicare has been 7.6 percent, and
    that is a little less than 2 percent of that is due to growth
    in enrollment; in other words, the number of beneficiaries.
    That is a lot faster than the economy grew.
        Over the next 10 years, however, we expect a much slower
    growth rate than we have seen in the last 10 years, in part
    because come January 1st, 2012, under current law we have to
    reduce payments to physicians by almost 30 percent. In
    addition, there are the Affordable Care Act savings provisions,
    notably the productivity adjustments to payment rate updates
    for most other kinds of health care providers, as well as the
    reductions in the Medicare Advantage payment benchmarks.
    Together these factors result in a slower rate of projected
    growth for combined A and B costs to about 5.3 percent on
    average over the next 10 years, and 3 percentage points of that
    is just in growth and enrollment as the baby boom retires.
        In the longer range under current law, we now have Medicare
    costs in total that represent about 3.6 percent of GDP, and
    that is projected under current law to be about 6.2 percent at
    the end of the trustees' long-range 75-year projection period.
    Now, that is far lower than the level that was projected prior
    to the Affordable Care Act. On the other hand, it is still a 70
    percent relative increase compared to today.
        So if the current law payment provisions for Medicare are
    sustainable in the long run, then we are looking at a
    substantial improvement in the financial outlook for Medicare.
    But there is a lot of evidence that suggests some of these
    payment provisions will not be sustainable in the long range.
        For example, Congress has overridden the physician payment
    reductions required in every year, in 2003 through 2011. And I
    will guess that you will be likely to continue doing that for
    some time to come.
        Also, as I testified before your committee in January, the
    productivity adjustments under the Affordable Care Act could
    well lead to a situation where Medicare payment rates are just
    inadequate so that they may not be viable in the long range.
    If, in fact, these features do not prove to be viable, then the
    actual cost for Medicare will be much higher than projected
    under current law.
        We have an alternative to current law, an illustrative
    alternative that the Board of Trustees asked to us to prepare
    to illustrate the extent to which costs could be understated
    under current law. Under this illustrative alternative, costs
    are projected in the long run to grow from their current level
    of about 3.6 percent of GDP to 10.7 percent by the end of the
    period, so that is about three times the current level.
        So, in conclusion, the current-law Medicare projections do
    serve as a valuable indicator of the potential improvement in
    the financial outlook that could be achieved if the growth
    rates in health care costs can be slowed down as current law
    attempts to do. Moreover, the Affordable Care Act puts in place
    a very aggressive program of research and development to help
    find innovations in the delivery of health care and how we pay
    for health care through bundling of payments, through more
    integrated care, all with the goal of improving the quality of
    care and the cost-effectiveness of care. This is a great
    opportunity to design and test and implement meaningful, long-
    lasting reforms. They offer the potential for lower cost
    levels, without question, and some potential for lower growth
    rates. Now, until these are tested, however, we can't really
    have a good sense for what will actually happen, but research
    is a good idea.
        I hope this information has been helpful to you all, and I
    look forward to continuing to work with all of you as you
    struggle with the financial challenges for beneficiaries and
    the budget from the Medicare program. Thank you.
        Chairman Ryan. Thank you.
        [The prepared statement of Mr. Foster follows:]

        Prepared Statement of Richard S. Foster, F.S.A., Chief Actuary,
                    Centers for Medicare & Medicaid Services

        Chairman Ryan, Representative Van Hollen, distinguished Committee
    members, thank you for inviting me to testify today about the financial
    outlook for the Medicare program as shown in the 2011 annual report of
    the Medicare Board of Trustees. I welcome the opportunity to assist you
    in your efforts to ensure the future financial viability of the
    nation's second largest social insurance program--one that is a
    critical factor in the income security of our aged and disabled
    populations.
        I would like to begin by saying a little about the role of the
    Office of the Actuary at the Centers for Medicare & Medicaid Services.
    We have the responsibility to provide actuarial, economic, and other
    technical assistance to policy makers in the Administration and
    Congress on an independent, objective, and nonpartisan basis. Our
    highest priority is to help ensure that policy makers have the most
    reliable technical information possible as they work to sustain and
    improve Medicare, Medicaid, and health care in the U.S. overall. The
    Office of the Actuary has performed this role on behalf of Congress and
    the Administration since the enactment of these programs over 45 years
    ago.
        I am appearing before your Committee today in my role as an
    independent technical advisor to Congress. My factual statements,
    estimates, and other information provided in this testimony are drawn
    from the 2011 Medicare Trustees Report; any opinions offered are my own
    and do not represent an official position of the Department of Health &
    Human Services or the Administration.
        The financial outlook for the Medicare program, as shown in the new
    Trustees Report, continues to raise serious concerns, in both the short
    range and the long range. Although the actuarial projections are much
    more favorable than those in the 2009 and earlier reports, as a result
    of the Patient Protection and Affordable Care Act, as amended by the
    Health Care and Education Reconciliation Act of 2010, a significant
    financial imbalance still remains for the Hospital Insurance (Part A)
    trust fund. In addition, key elements of current law are probably not
    sustainable--specifically, the ``sustainable growth rate'' formula for
    setting physician payment updates and the downward adjustments to
    payment rate updates for most other categories of health providers,
    based on economy-wide productivity growth. Should Congress find it
    necessary to override these factors in the future, as it has for 2003
    through 2011 in the case of the physician payment rates, then actual
    Medicare costs would be substantially greater than projected in the
    Trustees Report under current law.
        The purpose of the annual Trustees Report is first and foremost to
    evaluate the financial status of the Medicare trust funds, which must
    be done separately for each trust fund account since there is no
    provision for sharing financing or assets among these accounts. I
    recognize, however, that the Budget Committee's interest is primarily
    the overall cost of Medicare. I will first summarize the Trustees'
    findings for the separate accounts and subsequently address the overall
    cost of Medicare.
        The Hospital Insurance (HI) trust fund once again does not meet the
    Trustees' formal test for short-range financial adequacy. The
    exhaustion of the HI trust fund is projected to occur in 2024, 5 years
    earlier than was projected in last year's Trustees Report, reflecting
    lower projected payroll tax income as a result of the 2008-2009
    economic recession and higher levels of real (inflation-adjusted)
    expenditures. During 2008 through 2010, HI income fell short of program
    expenditures by a total of $54 billion, and these shortfalls are
    expected to continue in all future years under current law. Over the
    Trustees' long-range 75-year projection period, HI expenditures exceed
    scheduled tax revenues by an average of 0.79 percent of taxable
    payroll, primarily as a result of the retirement of the post-World War
    II ``baby boom'' generation. As described in more detail below, this
    actuarial deficit would be substantially larger if the productivity
    adjustments in current law could not be sustained.
        There are two separate accounts within the Supplementary Medical
    Insurance (SMI) trust fund--one for Part B, which covers physician,
    outpatient hospital, and other ambulatory care, and one for Part D,
    which provides subsidized access to prescription drug coverage. Because
    of the annual redetermination of financing for both Parts B and D, each
    account will remain in financial balance indefinitely under current
    law. Expenditures from these trust fund accounts, however, are
    projected to generally continue increasing at a faster rate than the
    national economy and beneficiaries' incomes, raising concerns about the
    long-range affordability of scheduled financing.
        In 2010, total Medicare expenditures were $523 billion or about 3.6
    percent of gross domestic product (GDP). Under current law and based on
    the Trustees' intermediate set of economic and demographic assumptions,
    costs in 2020 would be $932 billion or 4.0 percent of GDP. Total
    Medicare expenditures would continue to increase somewhat faster than
    GDP in the long range, reaching 6.2 percent at the end of the 75-year
    projection period. If the scheduled reductions in physician payment
    rates were not implemented and if the productivity adjustments to
    payment updates for most other provider categories were gradually
    phased out after the first 10 years, then Medicare costs would
    represent 10.7 percent of GDP in 2085.
                                   background
        Over 47 million people were eligible for Medicare benefits in 2010.
    HI, or Part A of Medicare, provides partial protection against the
    costs of inpatient hospital services, skilled nursing care, post-
    institutional home health care, and hospice care. Part B of SMI covers
    most physician services, outpatient hospital care, home health care not
    covered by HI, and a variety of other medical services such as
    diagnostic tests, durable medical equipment, and so forth. SMI Part D
    provides subsidized access to prescription drug insurance coverage as
    well as additional drug premium and cost-sharing subsidies for low-
    income enrollees. A Part D subsidy is also payable to employers who
    provide qualifying drug coverage to their Medicare-eligible retirees.
        Only about 22 percent of Part A enrollees receive some reimbursable
    covered services in a given year, since hospital stays and related care
    tend to be infrequent events even for the aged and disabled. In
    contrast, the vast majority of enrollees incur reimbursable Part B
    costs because the covered services are more routine and the annual
    deductible was only $155 in 2010. Similarly, a large proportion of Part
    D enrollees have reimbursable prescription drug costs, given the common
    occurrence of prescriptions, the preponderance of zero-deductible
    plans, and the significant proportion of low-income enrollees, for whom
    the deductible does not apply.
        The HI and SMI components of Medicare are financed on totally
    different bases. HI costs are met primarily through a portion of the
    FICA and SECA payroll taxes.\1\ Of the total FICA tax rate of 7.65
    percent of covered earnings, payable by employees and employers, each,
    HI receives 1.45 percent. Self-employed workers pay the combined total
    of 2.90 percent. Following the Omnibus Budget Reconciliation Act of
    1993, HI taxes are paid on total earnings in covered employment,
    without limit. The Affordable Care Act introduced an additional 0.9-
    percent HI payroll tax on individuals and couples with earnings above
    $200,000 or $250,000, respectively, starting in 2013. Other HI income
    includes a portion of the income taxes levied on Social Security
    benefits, interest income on invested assets, and other minor sources.
    ---------------------------------------------------------------------------
        \1\ Federal Insurance Contributions Act and Self-Employment
    Contributions Act, respectively.
    ---------------------------------------------------------------------------
        SMI enrollees pay monthly premiums: $115.40 for the standard Part B
    premium in 2011 (although, under a ``hold harmless'' provision, most
    enrollees pay the same $96.40 premium that was effective in 2008) and
    an average premium level of about $30 for Part D standard coverage in
    2011. For Part B, the standard monthly premium is designed to cover
    about 25 percent of program costs, with the balance paid by general
    revenue of the Federal government and a small amount of interest
    income. Starting this year, the Affordable Care Act requires fees on
    manufacturers and importers of brand-name prescription drugs, and these
    fees are allocated to the Part B trust fund account, reducing the need
    for premium and general revenue financing. Beginning in 2007, there is
    a higher ``income-related'' Part B premium for those individuals and
    couples whose modified adjusted gross incomes exceed specified
    thresholds. Beneficiaries exceeding the specified income thresholds pay
    premiums covering 35, 50, 65, or 80 percent of the average program cost
    for aged beneficiaries, depending on their income level, compared to
    the standard premium covering 25 percent. The resulting premiums in
    2011 range from $161.50 to $369.10 per month. Part D costs are met
    through monthly premiums, which are designed to cover 25.5 percent of
    the cost of the basic benefit for an individual, with the balance paid
    by Federal general revenues and certain State transfer payments. The
    Affordable Care Act introduced income-related additional Part D
    premiums, ranging from $12.00 to $69.10 per month in 2011, which are
    paid by high-income enrollees in addition to their regular plan
    premiums.
        The Part A tax rate is specified in the Social Security Act and is
    not scheduled to change at any time in the future under present law.
    Thus, program financing cannot be modified to match variations in
    program costs except through new legislation. In contrast, the premiums
    and general revenue financing for both Parts B and D of SMI are
    reestablished each year to match estimated program costs for the
    following year. As a result, SMI income automatically matches
    expenditures without the need for legislative adjustments.
        Each component of Medicare has its own trust fund, with financial
    oversight provided by the Board of Trustees. My discussion of
    Medicare's financial status is based on the actuarial projections
    contained in the Board's 2011 report to Congress. Such projections are
    made for current law under three alternative sets of economic and
    demographic assumptions, to illustrate the uncertainty and possible
    range of variation of future costs, and cover both a ``short-range''
    period (the next 10 years) and a ``long-range'' period (the next 75
    years). The projections shown in this testimony are based on the
    Trustees' ``intermediate'' set of assumptions. The projections are not
    intended as firm predictions of future costs, since this is clearly
    impossible; rather, they illustrate how the Medicare program would
    operate under a range of conditions that can reasonably be expected to
    occur.
        As the Trustees and I have cautioned, it is important to note that
    the actual future costs for Medicare are likely to exceed those shown
    by the current-law projections. Congress is almost certain to override
    the approximately 30-percent reduction in Medicare payment rates to
    physicians that is scheduled to take place in 2012. In addition, it is
    doubtful that other providers will be able to improve their efficiency
    and productivity sufficiently to match the downward adjustments to
    Medicare payment updates based on economy-wide productivity. Since the
    provision of health services tends to be labor-intensive and is often
    customized to match individuals' specific needs, most categories of
    health providers have not been able to improve their productivity to
    the same extent as the economy at large. Over time, the productivity
    adjustments mean that the prices paid for health services by Medicare
    will grow about 1.1 percent per year more slowly than the increase in
    prices that providers must pay to purchase the goods and services they
    use to furnish health care to beneficiaries. Unless providers could
    reduce their cost per service correspondingly, through productivity
    improvements or other steps, they would eventually become unwilling or
    unable to treat Medicare beneficiaries. In this event, Congress would
    likely override the adjustments, much as they have done to prevent the
    reductions in physician payment rates otherwise required by the
    sustainable growth rate formula in current law.
        It is possible that providers can improve their productivity,
    reduce wasteful expenditures, and take other steps to keep their cost
    growth within the bounds imposed by the Medicare price limitations. The
    implementation of payment and delivery system reforms, facilitated by
    the aggressive research and development program implemented by the
    Affordable Care Act, could help constrain cost growth to a level
    consistent with the lower Medicare payments. These outcomes are far
    from certain, however. As specific reforms have not yet been designed,
    tested, or evaluated, their ability to reduce costs cannot be estimated
    at this time, and thus no specific savings have been reflected in the
    Trustees Report projections for the initiative.
        To help illustrate the degree to which the current-law projections
    potentially understate actual future costs, the Board of Trustees asked
    the Office of the Actuary to prepare short- and long-range projections
    under an illustrative alternative to current law that assumes (i) all
    future physician payment updates are based on the increase in the
    Medicare Economic Index, and (ii) the productivity adjustments for most
    other categories of providers are gradually phased out during 2020-
    2035.\2\ My testimony includes the key results of these alternative
    projections.
    ---------------------------------------------------------------------------
        \2\ The illustrative alternative projections are available at
    http://www.cms.gov/ReportsTrustFunds/Downloads/
    2011TRAlternativeScenario.pdf.
    ---------------------------------------------------------------------------
               financial outlook for hospital insurance (part a)
        Chart 1 shows HI expenditures versus income since 1990 and
    projections through 2020. For most of the program's history, income and
    expenditures have been very close together, illustrating the pay-as-
    you-go nature of HI financing. The taxes collected each year have been
    roughly sufficient to cover that year's costs. Surplus revenues are
    invested in special Treasury securities--in effect, lending the cash to
    the rest of the Federal government, to be repaid with interest at a
    specified future date or when needed to meet expenditures.
        During 1990-1997, HI costs increased at a faster rate than HI
    income. Expenditures exceeded income by a total of $17.2 billion in
    1995-1997. The Medicare provisions in the Balanced Budget Act of 1997
    were designed to help address this situation. As indicated in chart 1,
    these changes--together with subsequent low general and medical
    inflation and increased efforts to address fraud and abuse in the
    Medicare program--resulted in a decline in HI expenditures during 1998-
    2000 and trust fund surpluses totaling $61.8 billion over this period.
    (Part of this decrease was attributable to the shift of a substantial
    portion of home health care costs to Part B, which improved the
    financial status of the HI trust fund but did not reduce Medicare costs
    overall.) After 2000, Part A expenditures and income converged
    slightly, as the Balanced Budget Refinement Act and the Benefit
    Improvement and Protection Act increased HI expenditures and the 2001
    economic recession resulted in lower payroll tax income.

        Starting in 2004, the Medicare Modernization Act increased Part A
    expenditures through higher payments to rural hospitals and to private
    Medicare Advantage health plans. Costs continued to increase in 2008,
    reflecting a correction to an accounting system that had inadvertently
    resulted in the payment of some hospice benefits from Part B, rather
    than Part A, along with the increasing popularity of Medicare Advantage
    plans. The year 2008 also saw the start of a significant decline in
    payroll tax revenues, caused by higher unemployment and slow wage
    growth associated with the economic recession that began in late 2007.
        HI expenditures are projected to increase at a much lower rate than
    usual during 2012-2020, due to the combined effects of continuing slow
    general inflation, the slower provider payment rate updates caused by
    the productivity adjustments, and a substantial downward adjustment in
    Medicare Advantage payment benchmarks and rebate percentages.
    Collectively, these factors contribute to a projected average annual
    cost growth rate of 4.9 percent through 2020, despite the advent of the
    baby boom generation reaching age 65 and qualifying for HI benefits
    during this period. About 3 percentage points of this increase are due
    to growth in the number of HI beneficiaries. For comparison, the
    average annual growth rate over the last 10 years was 6.6 percent, with
    enrollment growth contributing less than 2 percentage points to this
    average. Put another way, the per-beneficiary growth rate for the next
    10 years is expected to be less than half of the rate over the last 10
    years, principally as a result of the savings provisions in the
    Affordable Care Act.
        At the same time, growth in HI revenues is projected to accelerate,
    in part as a result of an assumed economic recovery from the 2008-2009
    recession (and subsequent weak economic growth) and in part because of
    the additional 0.9-percent payroll tax on high earners. Together, the
    slower expenditure growth and faster increase in HI tax revenues would
    significantly narrow the annual trust fund deficit over most of the
    short-range projection period.\3\
    ---------------------------------------------------------------------------
        \3\ Health care costs, including those for Medicare, increase in
    proportion to the number of beneficiaries, the increase in the average
    price per service, the number of services performed (``utilization''),
    and the average complexity of services (``intensity''). In contrast, HI
    payroll tax revenues increase as a function of the number of workers
    and the increase in average earnings, together with any changes in tax
    rates.
    ---------------------------------------------------------------------------
        The Board of Trustees has recommended maintaining HI assets equal
    to at least one year's expenditures as a contingency reserve. As
    indicated in chart 2, HI assets at the beginning of 2011 represented
    103 percent of estimated expenditures for the year, down significantly
    from the 150-percent level maintained in 2002-2007. Assets are
    projected to continue to decline steadily as a percentage of annual
    expenditures and to be exhausted in 2024. Redemption of trust fund
    assets, for use in covering annual deficits, requires a transfer of
    cash amounts from the general fund of the Treasury to the trust fund,
    thereby increasing the overall Federal Budget deficit. Note also that
    while ongoing receipts from payroll taxes and income taxes on Social
    Security benefits would be sufficient to cover roughly 85 to 90 percent
    of HI expenditures after 2024, it is not clear that many health
    providers would be willing or able to continue furnishing services to
    beneficiaries under such circumstances. In any case, Congress has never
    allowed the HI trust fund to become exhausted.

        As noted, the projected exhaustion date for the HI trust fund is 5
    years earlier than was shown in last year's report (2024 versus 2029).
    In the absence of the savings provisions of the Affordable Care Act,
    exhaustion would occur in 2016, or 8 years earlier. The projections
    under the illustrative alternative to current law, which assumes that
    the productivity adjustments are gradually phased out starting in 2020,
    are nearly identical to those shown in charts 1 and 2.
        The interpretation of dollar amounts through time is very difficult
    over extremely long periods like the 75-year projection used in the
    Trustees Report. For this reason, long-range tax income and
    expenditures are expressed as a percentage of the total amount of wages
    and self-employment income subject to the HI payroll tax (referred to
    as ``taxable payroll''). The results are termed the ``income rate'' and
    ``cost rate,'' respectively. Projected long-range income and cost rates
    are shown in chart 3 for the HI program. Cost rates are shown for both
    current law and the illustrative alternative to current law. (The
    income rates are the same under both scenarios.)

        Past income rates have generally followed program costs closely,
    rising in a step-wise fashion as the payroll tax rates were adjusted by
    Congress. Although the HI payroll tax rates are fixed in law (at the
    standard total rate of 2.9 percent, plus the additional 0.9 percent for
    high earners), total income rates will increase because the income
    thresholds for taxes on Social Security benefits and for the 0.9-
    percent additional rate are not indexed. Over time, a growing
    proportion of Social Security beneficiaries have become subject to
    income taxes on their OASDI benefits. Similarly, an increasing
    proportion of workers in the future will have earnings above the
    $200,000/$250,000 thresholds established by the Affordable Care Act. By
    2085, for example, an estimated 80 percent of workers would be subject
    to the additional 0.9-percent HI payroll tax.
        Past HI cost rates have generally increased over time but have
    periodically declined abruptly as the result of legislation to expand
    HI coverage to additional categories of workers, raise (or eliminate)
    the maximum taxable wage base, introduce new payment systems such as
    the inpatient prospective payment system, and make other changes. Cost
    rates decreased significantly in 1998-2000 as a result of the Balanced
    Budget Act provisions together with strong economic growth. After 2000,
    however, cost rates increased, partly because of the Balanced Budget
    Refinement Act and the Benefit Improvement and Protection Act and
    especially in 2008-2010 as the recent economic recession and weak
    recovery reduced the level of taxable payroll.
        Cost rates are initially projected to decline as the economy
    recovers and unemployment returns to more normal levels. Under current
    law, costs will increase as the baby boom generation becomes eligible
    for HI benefits in 2011-2030 but are projected to largely level off--
    and even decline somewhat--thereafter. This pattern results from the
    accumulating effect of the productivity offsets and other payment rate
    adjustments for Part A providers. For comparison, cost rates under the
    illustrative alternative projections increase rapidly throughout the
    long-range period, reaching 9.4 percent of taxable payroll in 2085,
    compared to only 4.9 percent under current law. Thus, depending on the
    long-range feasibility of the slower payment updates, scheduled tax
    revenues would be sufficient to cover about nine-tenths of HI
    expenditures (current law) or less than one-half (illustrative
    alternative).
        This critical impact can be further assessed by comparing the
    relative level of HI payment rates to the corresponding prices paid by
    the Medicaid program and private health insurance plans. Chart 4 shows
    such a comparison for inpatient hospital services.

        Medicare payment rates for inpatient hospital care in 2009 were
    about 67 percent, and Medicaid payment rates were about 66 percent, of
    those paid by private health insurance for their commercial plans.
    Under current law, Medicare and Medicaid payment rates are estimated to
    be approximately equal in 2011, and both are expected to decline in
    tandem relative to private health insurance payment rates over the next
    75 years. The increasing differential between Medicare and private
    payment rates is due to the productivity adjustments in 2012 and later
    for the Medicare payment updates (and, to a lesser degree, to the
    other, smaller downward adjustments in 2010-2019 specified by the
    Affordable Care Act in addition to the productivity adjustments).\4\ By
    the end of the long-range projection period, Medicare and Medicaid
    payment rates for inpatient hospital services would both represent
    roughly 33 percent of the average level for private health insurance.
    Medicare rates would be about one-half of the current relative level
    for Medicaid.
    ---------------------------------------------------------------------------
        \4\ For inpatient hospital services and some other categories of
    care, Medicaid payments are subject to certain upper payment limits
    (UPLs). For these services, total payments for all services in each
    category by a State Medicaid program cannot exceed what Medicare would
    have paid for the same care. The smaller UPL established by the
    Medicare rates forces a similar differential for Medicaid payments.
    ---------------------------------------------------------------------------
        Per-beneficiary HI costs are normally expected to increase faster
    than per-worker tax revenues due to health care price inflation and
    increases in the utilization and intensity of services. Collectively,
    these factors generally exceed the growth in average earnings per
    worker, on which HI taxes are based. If the current-law productivity
    adjustments can be sustained, however, then per-beneficiary costs would
    likely increase more slowly than per-worker taxes.
        Important demographic factors also contribute to the differential
    between HI income and expenditure growth rates. The effect of the baby
    boom generation on Medicare and Social Security is relatively well
    known, having been discussed by actuaries and others for almost 40
    years. Basically, by 2030 when the baby boom cohorts have enrolled in
    Medicare, there will be about 65 percent more HI beneficiaries than
    there are today, but the number of covered workers will have increased
    by only about 15 percent. When the HI program began, there were 4.5
    workers in covered employment for every HI beneficiary. As shown in
    chart 5, this ratio was about 3.4 workers per beneficiary in 2010. When
    the baby boom joins Medicare, the number of beneficiaries will increase
    more rapidly than the labor force, resulting in a decline in this ratio
    to about 2.3 in 2030 and 2.0 by 2085 under the intermediate
    projections. Other things being equal, there would be a corresponding
    increase in HI costs as a percentage of taxable payroll.

        There are other demographic effects beyond those attributable to
    the varying number of births in past years. In particular, life
    expectancy has improved substantially in the U.S. and is projected to
    continue doing so. The average remaining life expectancy for 65-year-
    olds increased from 12.4 years in 1935 to 19 years currently, with an
    estimated further increase to about 23 years at the end of the long-
    range projection period. Medicare costs are sensitive to the age
    distribution of beneficiaries. Older persons incur substantially larger
    costs for medical care, on average, than do younger persons. Thus, as
    the beneficiaries age, over time they will move into higher-utilization
    age groups, thereby adding to the financial pressures on the Medicare
    program.
          financial outlook for supplementary medical insurance part b
        Chart 6 presents estimates of the short-range outlook for the SMI
    Part B trust fund account. As noted previously, Part B premiums and
    general revenue income are reestablished annually to match expected
    program costs for the following year. Thus, barring exceptional
    circumstances, the program will automatically be in financial balance,
    regardless of future program cost trends.\5\
    ---------------------------------------------------------------------------
        \5\ The periodic odd patterns in projected revenues occur when the
    normal January 3rd payment date for Social Security benefits falls on a
    Saturday, Sunday, or holiday. In such cases, payment is advanced to the
    next earlier business day--which is generally December 31st of the
    prior year. This situation affected calendar-year Part B receipts in
    2009-2010 and will do so again in 2015-2016.
    ---------------------------------------------------------------------------
        Historically, Part B expenditures have increased at a rapid pace in
    most years. The average annual growth rate over the last 10 years was
    8.9 percent, for example, despite the modest increases in physician
    payment rates during this period.\6\ (About 1.6 percentage points of
    this increase were attributable to growth in the number of enrollees.)
    In contrast, Part B expenditures are projected under current law to
    increase by 5.9 percent per year, on average, over the next 10 years.
    As noted in the Trustees Report, this projection is unrealistic in view
    of the very high probability that Congress will override the roughly
    30-percent reduction in physician payment rates that is required on
    January 1, 2012 under the current SGR formula.
    ---------------------------------------------------------------------------
        \6\ The increase in 2010, at 3.5 percent, was a notable exception
    to this trend. The reasons for this abrupt deceleration in Part B
    costs, which occurred across most types of services, are still being
    assessed.

        Chart 6 also shows projected expenditures under the illustrative
    alternative to current law, which would base physician payment updates
    on the Medicare Economic Index; the average annual growth rate in this
    scenario is 7.8 percent. (Both the current-law and illustrative
    alternative projections are affected by the productivity adjustments
    for other Part B providers and by the lower Medicare Advantage payment
    rates that are being phased in during 2012-2017.) As noted for HI, the
    retirement of the baby boom generation will increase the number of Part
    B enrollees by about 3 percent per year. Projected Part B income under
    the illustrative alternative scenario is very similar to the current-
    law levels shown below.
        In past years, Part B income from premiums and general revenues has
    closely matched expenditures year by year, as would be expected given
    the annual financing basis for this part of Medicare. The projected
    future operations, however, show a sizable excess of income over
    current-law expenditures. In view of the near-certainty that Congress
    will act to prevent the 2012 reduction in physician expenditures, and
    will probably do so after financing is set for 2012, it is necessary to
    maintain a much higher contingency reserve than normal. In practice, if
    Congress continues to override the SGR formula, then actual Part B
    expenditures will more closely resemble the illustrative alternative
    projection, and the income-outgo relationship will be similar to that
    in past years.
        Chart 7 compares projected future Medicare and Medicaid payment
    rates for physician services relative to private health insurance
    levels. Medicare payment levels in 2009 were about 80 percent of
    private health insurance payment rates, and Medicaid payment rates in
    2008 were about 58 percent. In this illustration, Medicaid payment
    rates increase to 73 percent of private health insurance levels in 2013
    and to 77 percent in 2014 and then return to 58 percent. Medicare
    physician payment rates decline to 57 percent of private health
    insurance payment rates in 2012, due to the scheduled reduction in the
    Medicare physician fee schedule of nearly 30 percent under the SGR
    formula in current law. (As noted, Congress is very likely to override
    this reduction, as it has consistently for 2003 through 2011.) Under
    current law, the Medicare rates would eventually fall to 27 percent of
    private health insurance levels by 2085 and to less than half of the
    projected Medicaid rates. The continuing slower growth would occur as a
    result of negative update adjustment factors caused by growth in the
    volume and intensity of physician services that exceeds the increase
    factor specified by the SGR formula.

        Although not shown, the relationship between Medicare, Medicaid,
    and private health insurance payment rates for outpatient hospital and
    most other non-physician Part B care would be similar to that shown in
    chart 4 for inpatient hospital services.
        Chart 8 shows projected long-range SMI Part B expenditures and
    premium income as a percentage of GDP. Under present law, Part B
    beneficiary premiums will continue to cover about 25 percent of total
    Part B costs, with most of the balance drawn from general revenues.
    (Fees on manufacturers and importers of brand-name prescription drugs
    will provide up to $2.8 billion annually in 2019 and later, with
    varying amounts in 2011-2018. Over time, the fixed amount of Part B
    revenues from these fees will represent a declining share of GDP.)

        Under current law, SMI expenditures are projected to increase
    faster than the GDP as the baby boom generation becomes eligible for
    and enrolls in Part B. After 2030, however, costs as a percentage of
    GDP would be relatively level as a result of the statutory limits on
    physician payments and the compounding effects of the productivity
    adjustments for most other categories of Part B providers. As discussed
    previously, the physician payment reductions are very unlikely to occur
    in practice, and there is considerable doubt about the long-range
    viability of the productivity adjustments. Under the illustrative
    alternative projection, Part B costs would continue increasing rapidly,
    reaching 4.9 percent of GDP in 2085 or a little over twice the level
    projected under current law.
          financial outlook for supplementary medical insurance part d
        Medicare beneficiaries obtain Part D drug coverage by voluntarily
    purchasing insurance policies from stand-alone prescription drug plans
    or through Medicare Advantage health plans. The costs of these plans
    are heavily subsidized by Medicare through a combination of direct
    premium subsidies and reinsurance payments. Medicare provides further
    support on behalf of low-income beneficiaries and a special subsidy to
    employers who provide qualifying drug coverage to their Medicare-
    eligible retirees. The financial risk associated with the insurance for
    prescription drug costs is shared between each plan and Medicare.
    Medicare's cost for the various drug subsidies is financed primarily
    from general revenues. A declining portion of the costs for those
    beneficiaries who also qualify for full Medicaid benefits is financed
    through special payments from State governments.
        Chart 9 presents actual Part D costs in 2004-2010 and estimates
    through 2020.\7\ Part D income and outgo have been, and will continue
    to be, in virtually exact balance automatically due to (i) annual
    adjustments of premium and general revenue income to match costs, and
    (ii) a flexible appropriation process under which general revenues are
    transferred to the trust fund account on a daily basis as needed to
    cover that day's outlays. As a result of this latter feature, there is
    no need to maintain a contingency reserve in the Part D account.\8\
    Because payments to Part D plans are established based on a
    competitive-bidding system, the program is not affected by the
    productivity adjustments; accordingly, projected costs for Part D are
    the same under both current law and the illustrative alternative.
    ---------------------------------------------------------------------------
        \7\ Part D financial operations in 2004 and 2005 related only to
    the prescription drug discount card and low-income transitional
    assistance. The full Medicare prescription drug coverage became
    available in 2006.
        \8\ Individual Part D plans maintain contingency reserves in case
    actual costs during the year exceed their expectations.

        Over its short history to date (2006-2010), Part D expenditures
    have increased at an average annual rate of 6.9 percent (in part due to
    enrollment growth of 3.1 percent). A somewhat faster increase is
    projected over the next 10 years (9.7 percent, including enrollment
    growth of 3.0 percent), based principally on an expectation that the
    conversion from brand-name to generic prescription drugs cannot
    continue its very rapid pace for many more years. This change has
    contributed substantially to slower drug expenditure growth, for both
    Part D and other drug spending, but a sizable majority of Part D
    prescriptions is already filled by generic drugs.
        Actual Part D expenditure projections have been substantially lower
    to date than the original projections from 2003. This improvement has
    arisen primarily from three factors: First, starting in 2004, growth in
    total prescription drug expenditures in the U.S. slowed abruptly from
    what had been a decade and a half of double-digit increases to only a
    few percent per year. As noted, most of the slower growth in drug costs
    is believed to be attributable to the rapid expansion of tiered
    copayment arrangements in private health insurance plans, which provide
    a strong incentive for enrollees to switch to generic drugs. Part D
    plans also adopted these copayment arrangements, and the generic
    percentage for Part D is currently about 75 percent. This factor
    explains 54 percent of our overestimate of Part D costs. (The original
    estimates were made before this change in trend occurred.)
        Next, in our original estimates, we expected strong competition
    among Part D plans, but we assumed it would take a few years for the
    competition to build up and reach its full level. In practice, the
    competition was strong from the very beginning, with negotiated retail
    discounts and manufacturer rebates achieving the best levels prevailing
    at that time almost immediately, rather than after a few years. This
    difference explains another 27 percent of the overestimate.
        Third, in 2003 we anticipated that almost all Part D enrollees
    would enroll for coverage by January 1, 2006 so that they would have
    the insurance for the full year. Over a third of people did not sign up
    until well into the year, however, in part because of the extended
    first open enrollment period (which did not close until May 15). This
    factor had a relatively small impact on the overestimate since those
    beneficiaries who enrolled promptly in Part D tended to have higher-
    than-average drug expenditures. In addition, significantly more
    eligible individuals had credible coverage from other sources like the
    Veterans Administration or Indian Health Service than initially
    anticipated, based on the data available in 2003. Together, these
    enrollment factors explain 17 percent of the overestimate.
        Finally, all other factors combined explain the last 2 percent of
    the difference between our original 2003 estimates for Part D and the
    subsequent actual experience.
        Chart 10 shows projected long-range Part D expenditures and premium
    income as a percentage of GDP. As indicated, expenditures currently
    represent about 0.4 percent of GDP and are projected under the
    Trustees' intermediate set of economic and demographic assumptions to
    increase to 1.7 percent by the end of the long-range period. This
    increase reflects additional enrollees, as the baby boom generation
    reaches eligibility age, together with continuing growth in the prices,
    utilization, and intensity of prescription drugs.

        Part D beneficiary premiums are designed to cover 25.5 percent of
    the basic Part D benefit, on average. Because many enrollees qualify
    for the Part D low-income subsidy and do not have to pay full (or any)
    premiums, and because the low-income subsidy and retiree drug subsidy
    costs are not financed through premiums, total premium revenues
    currently represent about 11 percent of total Part D costs. The balance
    is paid by general revenues (79 percent) and State transfers (10
    percent).\9\
    ---------------------------------------------------------------------------
        \9\ These percentages are estimates for 2011; the balance will
    shift somewhat over time as (i) the State requirement declines from 90
    percent to 75 percent of the forgone cost of prescription drugs for
    full dual beneficiaries, and (ii) the majority of employer-sponsored
    retiree health plans transition from the Retiree Drug Subsidy (RDS) to
    Part D drug plans following the change in tax status of the RDS
    payments.
    ---------------------------------------------------------------------------
        Although the Part B and Part D accounts are automatically in
    financial balance, the rapid growth in combined SMI expenditures places
    an increasing burden on beneficiaries and the Federal budget. In 2010,
    for example, a representative beneficiary's Part B and Part D premiums
    required an estimated 13 percent of his or her Social Security benefit,
    and another 13 percent would be needed to cover average deductible and
    coinsurance expenditures for the year. In 2085, about 20 percent of a
    typical Social Security benefit would be needed to pay the Part B and
    Part D premiums, and about 26 percent would be required for copayment
    costs. Similarly, Part B and Part D general revenues in fiscal year
    2010 equaled about 19 percent of the personal and corporate Federal
    income taxes that were collected in that year. If such taxes are set at
    their long-term, past average level, relative to the national economy,
    then projected Part B and Part D general revenue financing in 2080
    would represent over 26 percent of total income taxes. Both the
    beneficiary and Federal burdens would be substantially greater in the
    future if the physician payment reductions were overridden and/or the
    productivity adjustments were phased out.
                        combined hi and smi expenditures
        The financial status of the Medicare program is appropriately
    evaluated for each trust fund account separately, as summarized in the
    preceding sections. By law, each account is a distinct financial
    entity, and the nature and sources of financing are very different
    between the trust funds. This distinction, however, frequently causes
    greater attention to be paid to the HI trust fund--and especially its
    projected year of asset depletion--and less to SMI, which does not face
    the prospect of depletion. It is also important to consider the total
    cost of the Medicare program, as shown in chart 11 under current law
    and the illustrative alternative to current law.

        Under current law, combined HI and SMI expenditures are projected
    to increase relatively quickly from 3.6 percent of GDP in 2010 to 5.6
    percent in 2035 and slowly thereafter to 6.2 percent in 2085. Absent
    the cost constraints imposed by the sustainable growth rate system for
    physician expenditures and the productivity adjustments to payment
    updates for most other categories of service, costs would continue to
    increase rapidly relative to the GDP. As indicated by the illustrative
    alternative projection, total Medicare expenditures would reach about
    10.7 percent of GDP at the end of the long-range period.
        The Social Security Act requires a test of whether the difference
    between Medicare's total outlays and its ``dedicated financing
    sources'' is expected to exceed 45 percent of total outlays within the
    next 7 fiscal years.\10\ As required under section 801 of the Medicare
    Modernization Act, the Board of Trustees has issued a determination of
    ``excess general revenue Medicare funding'' (the sixth such
    determination), since the ratio is estimated to exceed 45 percent in
    2011 and 2012. These findings in the 2010 and 2011 reports trigger a
    fifth consecutive ``Medicare funding warning.'' Section 802 of the MMA
    requires the President to submit to Congress, within 15 days after the
    release of the Fiscal Year 2013 Budget, proposed legislation to respond
    to the warning, and Congress is required to consider such legislation
    on an expedited basis.
    ---------------------------------------------------------------------------
        \10\ The dedicated financing sources are principally HI payroll
    taxes, the portion of income taxes on Social Security benefits that is
    allocated to the HI trust fund, beneficiary premiums, the fees on
    manufacturers and importers of brand-name prescription drugs, and the
    special State payments to Part D.
    ---------------------------------------------------------------------------
        Currently, most of the difference between Medicare expenditures and
    dedicated revenues is financed by the Part B and Part D general revenue
    transfers provided by law. The remainder of this difference equals the
    amount by which HI expenditures exceed HI tax income and premiums. This
    gap is currently being met by using the interest earnings on the assets
    of the HI trust fund and by redeeming a portion of these assets. The
    cash required for the payment of interest and the redemption of assets
    is drawn from the general fund of the Treasury. It is important to
    note, however, that there is no provision in current law to address the
    projected HI trust fund deficits once the fund's assets are depleted.
    In particular, it would not be possible to transfer general revenues to
    HI to make up the difference.
        The comparison of expenditures and dedicated revenues, as called
    for by section 801 of the MMA, is a useful measure of the magnitude of
    general revenue financing for Medicare plus the HI trust fund deficit.
    Similarly, the test underlying a ``Medicare funding warning'' can help
    call attention to the impact on the Federal Budget associated with the
    general revenue transfers to Medicare. The ``Medicare funding
    warning,'' however, should not be interpreted as an indication that
    trust fund financing is inadequate. That assessment can be made only by
    comparing each trust fund account's expenditures with all sources of
    income provided under current law, including the statutory general fund
    transfers and interest payments.
                                  conclusions
        In their 2011 report to Congress, the Board of Trustees emphasizes
    the continuing financial pressures facing Medicare and urges the
    nation's policy makers to take steps to address these concerns. They
    also argue that consideration of further reforms should occur in the
    relatively near future, since the earlier that solutions are enacted,
    the more flexible and gradual they can be. Finally, the Trustees note
    that early action increases the time available for affected individuals
    and organizations--including health care providers, beneficiaries, and
    taxpayers--to adjust their expectations.
        Although the current-law projections are poor indicators of the
    likely future financial status of Medicare, they serve the useful
    purpose of illustrating the exceptional improvement that would result
    if viable means could be found to permanently slow the growth in health
    care expenditures. The Affordable Care Act establishes a broad program
    of research into innovative new delivery and payment models in an
    effort to improve the quality and cost-effectiveness of health care for
    Medicare--and, by extension, for the nation as a whole. This process is
    in the early stages of development but offers an extraordinary
    opportunity to design and test alternatives with the potential to make
    quality health care much more affordable. Thus, the projections in this
    year's Medicare Trustees Report should provide an unequivocal incentive
    to vigorously pursue the development of effective and sustainable new
    approaches.
        Thank you for this opportunity to meet with your Committee. I
    pledge the Office of the Actuary's continuing assistance to the joint
    effort by the Administration and Congress to determine effective
    solutions to the financial challenges facing the Medicare program. I
    would be happy to answer any questions you might have on Medicare's
    financial status.

        Chairman Ryan. You know, Mr. Foster, when was the first
    year you did your appendix to the trustees report? Was last
    year the first year?
        Mr. Foster. I have been doing the appendices with my
    actuarial opinion statement since 1995 when I became chief
    actuary. The last 2 years they have had some extra language in
    there cautioning about the possible nonsustainability of
    current-law provisions.
        Chairman Ryan. The way I read your appendix, at least in
    the last 2 years, and please correct me if I am wrong, it reads
    kind of like the way CBO describes their alternative fiscal
    scenario. CBO basically says that they think the alternative
    fiscal scenario is what is sort of more reality-based, what
    they think based on patterns in Congress, the SGR getting
    patched and things like this, but that is the more likely
    outcome of policy, and therefore they are projecting based on
    that.
        Is that what you are attempting to do essentially with your
    appendix?
        Mr. Foster. That is what we do with the illustrative
    alternative projection where we essentially assume what was
    perhaps a more sustainable approach for these provisions. In my
    appendix, in the certification statement, I have to certify
    that the projections are reasonable based on reasonable
    assumptions and methods. I say that they are for current law,
    but then I caution that current law may not be sustainable.
        Chairman Ryan. Right.
        Mr. Foster. And point people towards the illustrative
    alternative to current law.
        Chairman Ryan. What is the 75-year unfunded liability under
    your alternative--you call it your alternative illustration?
        Mr. Foster. Yes. The way you define it for budget purposes
    is not the same way we define it for trust fund solvency. But
    using your definition where you take the difference between
    hospital insurance income and expenditures in the long term--
    this is a long-range 75-year present value--and then you add to
    that the present value of the general revenues that are
    provided in current law to pay for Parts B and D, but for which
    there is no dedicated revenue source, if you take that
    definition, then the answer is $37 trillion as the present
    value over 75 years.
        Chairman Ryan. What was that number last year in your
    appendix?
        Mr. Foster. Similar, perhaps a little bit lower. I don't
    have it handy.
        Chairman Ryan. Could you bring up chart 1? I see your chart
    number 4, which is your--in your testimony we have basically
    that chart. We just put it in color. Chart 4 and chart 7 in
    your testimony. Chart 1 here, which is chart 4 in your
    testimony, is the Medicare hospital reimbursement rates. You
    are showing us that Medicare and Medicaid hospital
    reimbursement rates are going from about 80 percent today down
    to 60 percent in 2020, and down to 33 percent at the end of the
    budget window.
        Can you show us chart 2, please?
        Then you are showing us physician payments are going down
    from 60 percent today to 33 percent, Medicare below Medicaid,
    starting in a few years.
        Is this sustainable? I guess that sort of is the reason why
    you have this appendix. If Medicare is going to be paying
    providers at rates by which for every senior citizen walking in
    their door, walking into the hospital or the doctor's office,
    they lose money on each person, are they going to keep
    providing the benefit? And have you made calculations as to
    what that is going to do to the Medicare provider community
    with respect to whether they have negative margins, meaning
    bankruptcy, or not, and what are those projections as you carry
    these numbers out?
        Mr. Foster. Yes, you had several questions in there.
        Chairman Ryan. Yes. Feel free to take your time.
        Mr. Foster. First, regarding these comparisons, we assume
    that private health insurance payment rates to their doctors
    and their hospitals and so forth would continue to be
    negotiated in an open market pretty much the way they are now.
    And then we compare the Medicare rates, payment rates, to those
    of private health insurance. Because of the productivity
    adjustments and some other reductions in growth rates within
    the Affordable Care Act for all the Part A providers, you get
    the pattern that you showed in the prior slide, and the figures
    you quoted were correct. And that assumes that, again, the
    private health insurance can't do something comparable to these
    mandated reductions in growth rates that are part of current
    law now for Medicare.
        In looking at those, it is pretty hard to imagine that they
    could be sustainable, because when you think about it, the
    providers have to pay certain input cost increases. They have
    it to pay their workers somewhat more next year than they do
    this year. They have to pay higher energy costs. They have
    medical supplies. They have rent or leases that go up. And they
    don't get a break from the energy company just because Medicare
    is paying them a lower payment update. They still have to pay
    all of these input costs.
        So what we are paying them in the future is the growth of
    their input cost--input price, excuse me--minus about 1.1
    percent, representing the productivity gain in the economy
    overall. That accumulates, as we have seen in these charts, to
    quite a bit of a difference. That is why I have tried to raise
    concern about this and make sure that all of you are aware. You
    can monitor this and make sure that nothing bad happens,
    because as you pointed out, Mr. Chairman, if at some point our
    payment rates to providers become less or significantly less
    than their cost of providing services, they either will be
    unwilling or unable to continue providing services.
        Now, before that happened, I think you all would have to
    act to override the productivity adjustments, much as you have
    had to do for the sustainable growth rate formula for physician
    payments. So I think that is the more likely scenario, but
    absence that, there could be very serious problems.
        Chairman Ryan. What would your projection be on the amount
    of providers unwilling or unable as time goes on, say, 2030,
    2050 as we go through this chart?
        Mr. Foster. Well, we estimated--we did a simulation for
    hospitals, skilled nursing facilities and home health agencies
    looking at their actual cost report data and calculating that
    if everything else stays the same, just what would the impact
    of these slower provider payment updates have on their margins
    over time. I will confess I have forgotten the specific
    figures, but they are in our April 22nd memo that showed over
    even within 10 years a significant proportion of these
    providers would go from positive margins to negative margins
    solely as a result of the slower payment updates. In the longer
    term in the trustees report it gets up to be over 40 percent of
    these providers would have to--would end up shifting to
    negative profit margins.
        Chairman Ryan. Forty percent?
        Mr. Foster. Yes, sir.
        Chairman Ryan. Premium support is an idea that has been
    around for years. You have looked at lots of different plans.
    There is the 1999 Breaux-Thomas, there is Rivlin-Domenici,
    there is the Rivlin-Ryan, there is what we put in the House
    budget. I don't want to get into specifics of each plan because
    they all approach premium support in a slightly different way.
    And the design features of premium support are clearly
    something that is worth debating and negotiating and all of the
    rest. But each of these ideas share an underlying principle,
    and that is that a system requiring providers to compete
    against each other for a patient's business with more
    assistance for the poor and the sick and less for the wealthy
    can responsibly reform Medicare without compromising its role
    as a vital safety net program.
        I want to get your basic framework thoughts on this. Do you
    think a system set up along these kinds of design features can
    achieve savings in Medicare while continuing to provide for a
    basic Medicare benefit?
        Mr. Foster. As a general rule, certainly. These kinds of
    premium support approaches have been discussed now many times
    over many years. There have been different designs. Most the
    premium support proposals have used an approach not unlike
    Medicare Advantage where there is payment benchmark that plans
    are tested against. And if a plan can come through with more
    efficiency and a lower cost than that benchmark, then
    participants in that plan will get a cheaper premium, and the
    plan would benefit and Medicare would benefit from the lower
    cost.
        On the other hand if a plan is less efficient and has a
    cost above the benchmark, then the beneficiary would have to
    pay most of the extra difference or all of it. Those plans
    would be less attractive.
        So we have estimated for many years that the competition
    among plans in a premium support setting like this could have
    advantages and lead to somewhat lower costs for Medicare. It
    can get to you the lowest cost consistent with good quality of
    care. It may or may not help a lot with the cost growth. In
    other words, you might go from a starting point here down to a
    lower level because of the competition, but they both might
    grow at a similar level. It is much harder to attack the growth
    rates.
        If you build into a plan like this, a different approach
    for pay in the support which has an index built in that is
    typically lower than the expected premium growth or the cost of
    health care, then you can address the cost growth issue, but
    then you get into all the issues of do the premium support
    payments remain adequate over time.
        Chairman Ryan. So the secret then is, which has been vexing
    all of us from both sides of the aisle, how do you get at the
    root causes of cost inflation? So we shouldn't--what I am
    getting from you is we shouldn't delude ourselves that Medicare
    reform fixes everything in health care. It can help fix
    Medicare problems, but unless you address the underlying root
    cause of health inflation, you really can't fix these problems
    at the end of day. Is that not the case?
        Mr. Foster. Yes, I would agree with that. If you look at
    the causes, the underlying causes, of health care cost growth,
    income is a big part of it. The richer we are, the better
    health care we want, and the better health care we can afford.
    That problem kind of takes care of itself, because if costs are
    going up comparable to our incomes, then the overall cost is
    similar to growth in the GDP, and nothing gets harder to
    handle. But often, of course, is goes up faster than that.
        Another of the major factors driving health care costs is
    technology.
        Chairman Ryan. Yes.
        Mr. Foster. We all want the best possible medical care, and
    the research and development community is more than willing to
    invent new techniques, and treatments, and drugs and so forth,
    and often they are pretty expensive.
        Chairman Ryan. And on our fee-for-service model, that sets
    the incentive structure for them just to keep billing and keep
    billing and keep adding to the cost, because they just get
    reimbursed on a fee-for-service schedule.
        Would you agree that perhaps a better lying incentive
    structure where the provider community on technology has a
    research and development incentive to provide better costs,
    cheaper devices that have more value? Do you believe that under
    the right incentive structure, you could put in place sort of a
    virtuous cycle, productivity improvement and innovation,
    working to bend the cost curve versus the status quo as we now
    know it today?
        Mr. Foster. Yes, I think it is possible. To date there has
    been very little incentive to focus on cost-reducing
    technology. Most of it has been cost-increasing, with some
    exceptions.
        To the extent that you send a signal to this research and
    development sector that things have changed, we can no longer
    afford to pay for every new thing that comes along, even if it
    is only marginally an improvement that costs 10 times as much,
    we can't afford to do that anymore. Hopefully they will get the
    message and turn their considerable abilities to cost-reducing
    techniques. So premium support can be consistent with that
    approach. Traditionally fee-for-service is typically not.
        Mr. Pascrell. Mr. Chairman, I have a question.
        Chairman Ryan. When you have your time.
        Mr. Pascrell. You have time. Would you yield?
        Chairman Ryan. No.
        Mr. Pascrell. Thank you, Mr. Chairman.
        Chairman Ryan. You are welcome.
        Mr. Goss, a quick one. Some have argued that because Social
    Security is able to pay full benefits until 2036, action now is
    not necessary. You hear this more and more these days, which is
    there is no problem, don't have to worry about it, not until
    2036.
        I think we know what happens then if nothing is done, but
    give us a sense of the cost of delaying and the sense of how
    gradual reforms would be if we do it now versus how severe they
    would be if we delay. And what is the growth in the unfunded
    liability on average on a year-to-year basis?How much deeper of
    a hole are we digging ourselves every year we delay fixing this
    problem? Because it is a pay-as-you-go system, 10,000 boomers
    retiring every day with far fewer workers following them in the
    workforce. It is the same problem with Medicare. What kind of
    hole are we digging ourselves if we don't do anything, and how
    gradual versus how severe are we looking at based upon when we
    decide to do something?
        Mr. Goss. Thank you. Excellent question.
        I think it is really the same for Medicare as it is for us.
    Our unfunded obligation, we project, over the next 75 years,
    which is for the shortfalls in the years 2036 through 2085, is
    about $6.5 trillion in present value as of 2011. In fact, if we
    waited 5 years to enact changes from now, the present value of
    that shortfall as of 2011 would still be $6.5 trillion. The
    shortfall is what it is over the period.
        Indeed, the real advantage of enacting something soon--and
    I would emphasize enacting something soon as opposed to acting
    per se--is that it really gives people advance warning, allows
    you many more options to consider, and allows you the ability
    to phase things in more gradually over time. It is possible
    that we could just simply follow present law, wait until 2036,
    do nothing, and allow benefits to drop by 23 percent
    precipitously for everybody receiving benefits in Social
    Security. If we really did nothing, in 2018 very, very much
    sooner, our Disability Trust Fund will become exhausted, and we
    would have a 14 percent reduction in benefits.
        Chairman Ryan. In 2018?
        Mr. Goss. In 2018. That is the date where we are
    projecting----
        Chairman Ryan. Fourteen percent.
        Mr. Goss. A 14 percent reduction in disability insurance
    benefits would be what would be required because we would only
    have the continuing revenue coming into that fund. So that is
    actually our sort of ``most soon date'' that we are concerned
    about at this point.
        There are many remedies for that to get OASI and DI back on
    track together, but our sense is, and we have always emphasized
    and our trustees have always emphasized, enacting relatively
    soon allows you, the Members of the Congress, more options to
    consider; allows you to give people advanced warnings of the
    changes that will be coming, whether it be more taxes or lower
    benefit levels; and also allows you to phase in the changes
    more gradually, which is really important.
        Chairman Ryan. Thank you.
        Mr. Van Hollen.
        Mr. Van Hollen. Thank you, Mr. Chairman, and thank you both
    for your testimony.
        Let me just pick up on the Social Security questions here
    just so I understand this. With respect to the disability
    portion of Social Security, what you are saying is we would be
    required to make essentially a transfer of some of the trust
    fund revenues to that component of the program in the near
    future; is that right?
        Mr. Goss. Well, we could do that. Under the law we cannot
    do that at this point. We had a similar situation in 1994,
    where the DI Trust Fund, the split insurance was exhausting
    very quickly, and the OASI Trust Fund had plenty of money, and
    we simply had a reallocation of tax rates without changing the
    total tax rate for OASI and DI combined. The same could be done
    in order to get the solvency of the DI Trust Fund and OASI
    Trust Fund back together.
        Mr. Van Hollen. And your testimony with regard to 2035 and
    2036, that testimony involved all components of the trust fund,
    correct?
        Mr. Goss. That is assuming that we do not let the DI Trust
    Fund----
        Mr. Van Hollen. I just want to make it clear. We are not
    talking about adding to the problem; your numbers already
    assume we have addressed that issue.
        Mr. Goss. Exactly.
        Mr. Van Hollen. Which we can the way you said. Thank you.
        Just with respect to Social Security, there has been a
    piece of legislation that was introduced recently by two
    Members of the Republican leadership to privatize Social
    Security. Have you had a chance to look at that?
        Mr. Goss. I believe you might be referring to the SAFE
    bill?
        Mr. Van Hollen. Yeah. This is legislation introduced by
    Congressmen Hensarling and Sessions.
        Mr. Goss. We took a quick look at that. We have not done a
    formal estimate on that, but our sense is that particular
    proposal as put forth is perhaps incomplete and not fully
    formed.
        As it is described, it would give people the option to
    begin to have their portion, half of their payroll taxes,
    directed to an account, and after 15 years to have the entirety
    of their payroll taxes directed to an account, including the
    employer's share also. And the cost to them would be that they
    would never get any benefits, they or their dependents.
        The problem in terms of the solvency of Social Security is
    that the reduction in payroll taxes for people who chose the
    option would occur right away; the reduction in benefits might
    occur with a 20- or 30-year delay. So this would put a
    considerable additional negative effect on the solvency of
    Social Security and would cause or trust fund exhaustion date
    to be earlier than 2036.
        We have dealt with several other proposals that would have
    some of the features. All of them, including the proposal put
    forth by Chairman Ryan, have in the past dealt with this issue
    by coming up with additional sources of revenue.
        Mr. Van Hollen. I understand, but I am talking about this
    particular piece of legislation. Just so I understand your
    testimony, it would accelerate the insolvency of the Social
    Security Trust Fund, correct?
        Mr. Goss. It would absolutely, yes.
        Mr. Van Hollen. Just turning to the Medicare issue--and,
    Mr. Foster, thank you for your testimony and expertise on this
    issue. You recognized in your testimony that there are lots of
    features in the Affordable Care Act that allow us to experiment
    with new incentives for the provision of care to focus more on
    coordination of care rather than sort of the volume of care
    that is incentivized in some way in fee-for-service. And we had
    a lot of testimony yesterday from Secretary Sebelius, and I
    think everybody recognizes that those changes need to be made.
        If you repeal the Affordable Care Act, you, of course,
    eliminate the authority to move forward with those changes; do
    you not?
        Mr. Foster. Yes, sir.
        Mr. Van Hollen. Let me just ask you with respect to the
    Medicare Trust Fund, because clearly we need to make the kind
    of changes to address those issues. But I think there is also a
    lot of misunderstanding about the Medicare Trust Fund. So just
    so people understand, the Medicare Trust Fund relates just to
    Medicare Part A; does it not?
        Mr. Foster. There is a separate Medicare Trust Fund for
    Part A. There is another trust fund for Parts B and D. Each
    have their own separate accounts within that trust fund.
        Mr. Van Hollen. Okay. But with respect to the payroll tax,
    your Medicare payroll tax, those revenues are directed for Part
    A; is that correct?
        Mr. Foster. That is correct.
        Mr. Van Hollen. Okay. And when we talk about the year 2023,
    creating an issue with the solvency of a trust fund, that is
    what we are referring to, correct?
        Mr. Foster. Yes, sir.
        Mr. Van Hollen. We are not referring to Parts B or D,
    correct?
        Mr. Foster. That is right. Those by their design for
    financing, barring some extraordinary circumstance, should
    never go broke.
        Mr. Van Hollen. Right. And there was a deliberate decision
    by the Congress, correct, for example, with Part D prescription
    drugs, to fund it out of general revenue, either current
    revenues or through deficit spending, correct?
        Mr. Foster. Yes. The primary form of financing for Part D
    is general revenues. There is also premiums paid by enrollees
    and special State payments, since the cost of drugs for dual-
    beneficiaries transferred from Medicaid to Medicare.
        Mr. Van Hollen. Right.
        Now, we had a conversation, and you made the point and I
    think the chairman made the point we need to address some of
    the cost structures and incentives in the whole entire health
    care system. And if I could just put up a chart here that
    shows--these are the per enrollee increases in health care
    costs. And as you can see, the average increase in a cost for
    the Medicare per beneficiary has been lower than in the private
    market, where it has been considerably higher. So essentially
    if you were to say to someone who is enrolled in the Medicare
    program they had to go out and get their insurance in the
    private market, they would be facing substantial costs; would
    they not?
        Mr. Foster. That question leads to a not straightforward
    comparison of the advantages and disadvantages of each form,
    private health care plans versus Medicare fee-for-service, and
    each one does have advantages and disadvantages. Comparisons of
    this type are a little difficult. You have done a couple things
    that are very good. First of all, it is per capita rather than
    just total aggregate expenditures.
        Now, something else I would recommend, and this may or may
    not have been done here, is to do this for a similar package of
    benefits. For example, Medicare only gained drug coverage
    starting in 2006, so over some longer period of time, you end
    up counting drugs for Medicare some of the time and not the
    rest of the time.
        The other thing is that if I read this correctly, this is
    based on 2002 to 2009.
        Mr. Van Hollen. Correct.
        Mr. Foster. Over long periods of time, they tend to grow
    similarly, with Medicare at a slightly slower rate, as much as
    a percent slower on average, which is a good difference. But
    over subperiods it can be quite a bit either way.
        Mr. Van Hollen. Right. No, I understand. I mean, if you
    look at the 50-year cycle, as you said, Medicare outperforms
    the private market on the per enrollee cost structure by about
    1 percent, but in recent history, in fact, you see the numbers
    here. And I think there is general agreement here that we
    should reduce--try and reduce health care costs throughout the
    private market.
        Now, you raise some issues there as to what some of the
    potential negative consequences would be in doing that. One
    would be to provide less incentive for research and development
    into new treatments and technologies, and maybe focusing more
    resources on providing care with the existing treatments; is
    that correct?
        Mr. Foster. Well, I mentioned that it would be nice to get
    the benefit of technology the way most other sectors of the
    economy have for computers and cars and televisions, and many
    other things have gotten relatively less expensive over time
    because of technology. For health care we tend to get more and
    better new things and much more expensive. If the same approach
    were applied to developing less expensive treatments, for
    example one-time-use implantable defibrillators rather than
    many-time-use defibrillators, that can be a good thing and help
    us save money.
        Mr. Van Hollen. Absolutely. Just on the point--I am going
    to finish with this because of the confusion. If we go to the
    next slide, and I want to make it very clear that we all know
    in this committee we face a big challenge on the future of
    Medicare. We have a very big difference of opinion on how to
    address it. But I think in our conversations about trust funds
    and payroll, we need to make clear a couple things.
        This chart is taken from the data in your current report
    with respect to the shortfall. And when we are talking about
    the Part A Trust Fund, which is--you know, a lot of language we
    hear all relates to the solvency of that trust fund in 2023;
    does it not?
        Mr. Foster. Yes, that is correct.
        Mr. Van Hollen. Okay. And so when you are looking at that
    specific component over the 75-year period, and you want to
    fully fund that, that is the--this represents the shortfall,
    does it not, in Part A?
        Mr. Foster. That looks about right. I can't see the figures
    from here. But it is correct that under current law if all the
    provisions for the payment rates are sustainable in the long
    range, then the problem to solve is not nearly as big as it
    used to be. It is of that order of magnitude.
        Mr. Van Hollen. And just for illustrative purposes--and we
    did the calculation, and this is for illustrative purposes
    only--in order to close the shortfall in the Part A, in the
    trust fund, what we all refer to as the trust fund, you would
    have to increase the Medicare payroll tax from 2.9 percent to
    3.69 percent. Again, I am not recommending that proposal, but
    for illustrative purposes people need to understand that when
    we are talking about solvency of the Part A Trust Fund, which
    is what most of the conversation has been about, that is what
    we are talking about.
        Now, everything in blue is funded out of general revenue,
    correct?
        Mr. Foster. This is hospital insurance?
        Mr. Van Hollen. With the possible exception of some--let me
    correct that. Yes, it is. No. This is Medicare expenditures.
        Mr. Foster. This is Medicare total. Okay. A lot of the blue
    then is general revenues, a lot of it is payroll taxes, a lot
    of it is premiums.
        Mr. Van Hollen. Premiums. And the premium component. And
    there is no doubt there is a challenge, so we address that
    challenge in two ways. One, we have to make the reforms in the
    system; again, big differences on how do you it. And then as
    part of the broader conversation, you have to discuss the
    revenue component, and no one should be--I don't think anybody
    should be kidded into thinking you can solve this problem
    realistically on the revenue side. You can't.
        On the other hand, revenue, it should be part of this
    discussion, just like when you are talking about dealing with
    Social Security solvency, what--how much income is subject to
    payroll tax as part of the income. So I just wanted to use this
    chart for the purposes of people understanding that when we are
    talking about trust fund solvency, we are really talking about
    that red sliver up there with respect to the Medicare payroll
    taxes.
        Thank you very much, Mr. Chairman.
        Chairman Ryan. Mr. Campbell.
        Mr. Campbell. Thank you, Mr. Chairman.
        I will yield to the chairman.
        Chairman Ryan. Yeah. I just want to get in the Medicare
    cost--we have a chart from CBO, table 3, a long-term report
    that shows four time horizons. Three out of those four time
    horizons, Medicare's cost growth per capita grew faster than
    other health insurance. When you widen the time horizon, it
    doesn't make the case that Medicare always costs less per
    enrollee than other health care. The only point I would make
    also is, look, if you pay providers 80 cents on the dollar, of
    course it is going to cost less, but you are paying them 80
    cents on the dollar.
        I would also say if we just focus on the Part A Trust Fund
    which is going insolvent, we are ignoring the much larger
    liabilities. Part B and Part D, that is over 20 trillion in the
    trustees report of unfunded liability as well.
        So it is important to look at the blue and the red because
    the entire system taken together, from the testimony we heard
    yesterday from the economists, 51 percent of Medicare is being
    cash-flowed by the general fund, bonds, we are borrowing. And
    so I don't think anybody is arguing that that is a sustainable
    situation. I think it is very clear the sooner we deal with
    this problem, the better off everybody is. If you just underpay
    providers, yeah, it is going to cost less, but are providers
    going to keep providing the benefit, I think, is the question.
        With that, thank you.
        Mr. Campbell. Thank you.
        I am just going to focus in my reduced time here a couple
    of questions on understanding better just where we are and what
    the straight-line solutions are.
        First, Mr. Goss, we have a positive cash flow if you put
    both trust funds together right now. When do you project that
    turns negative?
        Mr. Goss. In terms of cash flow where we do not include the
    interest that is credited to the trust funds in 2010, we turn
    to a negative cash flow for the combined OASI and DI Trust
    Funds. We actually were at a negative cash flow situation for
    the Disability Insurance Trust Fund starting in 1990--starting
    in 2005. But as of 2010, on a combined basis, they have going
    to negative cash flow. But the amount of interest that is
    credited the trust funds exceeds that cash flow shortfall and
    will continue to through 2022.
        Mr. Campbell. And if we were to continue, when you say the
    trust fund is exhausted in 2036, that, I presume, means in 2036
    then, payments of--Social Security payments would have to be
    reduced to whatever the income was at that point?
        Mr. Goss. Precisely, solely because our trust funds under
    the law do not have the authority to do any borrowing. That
    would mean that at that point when we had 77 cents of tax
    revenue coming in for every dollar's worth of scheduled
    benefit, we would only have that much amount of money. We would
    have to--somebody would have to make a decision as to how we
    would pay benefits.
        Mr. Campbell. If you wanted to increase payroll taxes today
    just on a straight-line basis to make both trust funds solvent
    within your 75-year window, what percentage increase in taxes
    would that take?
        Mr. Goss. It would require an increase in the payroll tax
    rate from 12.4 by about a little over 2 percent of payroll. So
    that would be about a one-sixth increase in payroll taxes, from
    12.4 up to 14.6, roughly.
        Mr. Campbell. Okay, all right. Thank you very much.
        Mr. Foster, currently what percentage of total Medicare
    expenditures are covered by Medicare taxes?
        Mr. Foster. I can calculate that for you. It is most of it.
        Mr. Campbell. It is more than 50----
        Mr. Foster. Certainly. Well, if you count the payroll
    taxes, and if you are talking about Part A only, or are you
    talking about total----
        Mr. Campbell. The whole system.
        Mr. Foster. Okay. The payroll taxes would be a smaller
    proportion, but it would be in the neighborhood of 35 or 40
    percent of the total.
        Mr. Campbell. Okay. There is something in law that says
    that--that triggers that the President is supposed to issue
    some solution at a certain point. Are we at that point? What is
    that point? And has the President proposed something?
        Mr. Foster. Yes. What you are referring to is a formal test
    instituted by the Medicare Modernization Act in 2003, which
    says if you take the difference between total Medicare outlays
    and total Medicare dedicated revenues, if that difference is
    expected to reach 45 percent of the total cost within 7 years,
    then the trustees have to issue a determination of excess
    general revenue Medicare funding. If you get two such
    determinations in two successive reports, that triggers a
    Medicare funding warning. Then--we issued the fifth such one
    with this current report. Then the President has the obligation
    to issue proposed legislation----
        Mr. Campbell. And final question, because I am--I just had
    to--have you done any projections that assume--you talk about
    current law, but that assume that we do not lower physician
    reimbursement rates and that the Medicare reductions that are
    in the ObamaCare law don't go into effect?
        Mr. Foster. Yes, generally. That is the basis of our
    illustrative alternative to current law.
        Mr. Campbell. Thank you.
        Chairman Ryan. Ms. Schwartz.
        Ms. Schwartz. Thank you.
        I just want to get to Medicare, but just a couple things I
    did want to follow up on the Social Security.
        First let me say I agree with and want to associate myself
    with the opening comments of the ranking member in terms of a
    balanced approach as we move forward, and that applies to our
    deficit reductional role, that we need to be able to look at
    tax expenditures as well; and to only look at spending, whether
    it is nondefense discretionary, whether it is Medicare--Social
    Security is its own piece--is really just not a balanced
    approach, and we really need to have everything on the table.
    So I appreciate his comments and want to echo them.
        And I think the last few answers actually suggest that even
    when we are looking at Social Security and Medicare, that we
    need a balanced approach, and the balanced approach that allows
    to us look both at cost savings and potential for other
    revenues would be a way to approach it to really look at
    everything on the table.
        I did want to, again just following up on the discussion
    about Social Security, there was some discussion about just for
    illustrative purposes what percentage you would need to
    increase the tax in order to get to solvency, and you did
    answer that question of having to go 2.9 to 3.69. Again, that
    is just illustrative purposes. I just want quickly if you just
    answer, because I do want to get to Medicare, if you could just
    answer that.
        There are other options there as well. The cap on the
    payroll income that applies--that taxes are applied to. For
    example, have you looked at other opportunities for ways we
    might be able to bring in some additional revenues so maybe the
    cuts don't have to be so drastic or that we can increase the
    solvency of the trust fund?
        Mr. Goss. We certainly have. One other clarification Rick
    and I were just talking about is going from 2.9 to about 3.7.
    That is the Medicare Part A.
        Ms. Schwartz. I am sorry, and it was 12.4?
        Mr. Goss. Also it would be 12.4 up to about 14.6 would be
    an immediate tax rate increase on the payroll tax that would be
    sufficient to----
        Ms. Schwartz. But if we didn't want do a tax rate increase
    at all, there are other options.
        Mr. Goss. If we didn't want to do that, there have been
    several other possibilities that have been considered. One
    would be to instead of raising the tax rate on the earnings up
    to our current taxable maximum, which is 106,800, would be to,
    in fact, raise that taxable maximum itself. Now, that would be,
    in fact, an increase in the tax rate from nothing to 12.4 for
    the earnings above that.
        One popular proposal that has been put forth in many places
    by both the fiscal commission, the President's fiscal
    commission, and by the Domenici-Rivlin Commission would be to
    gradually raise the payroll tax rate--but to raise the taxable
    maximum up to cover not ultimately about 83 percent, but about
    90 percent.
        Ms. Schwartz. Which is where it started.
        Mr. Goss. Which is where we were back in 1983, 1984. That
    would solve about a third of our long-term problem. If we
    eliminated the taxable maximum entirely, as is the case for the
    Medicare 2.9 percent, that would basically eliminate our 75-
    year shortfall.
        If I may, just one other item that I would want to mention,
    another revenue-enhancement proposal that has been put forth
    actually in Chairman Ryan's proposal and was picked up in the
    Domenici-Rivlin proposal for the Bipartisan Policy Center was
    to tax employer-sponsored group health insurance premiums, and
    that would cover about half of our long-term shortfall.
        Ms. Schwartz. Thank you. I appreciate the fact that there
    are other options for us to explore.
        I don't have a lot of time left, but I really appreciate
    both of you adding really good information about why we are in
    some of these situations. We anticipated all the baby boomers
    in Social Security Trust Fund. Good, smart move. For some
    reason we did not in Medicare. It seems to be that those same
    seniors are surprised, to the Medicare Trust Fund. The
    additional--it is almost a doubling, not quite. So going from
    40 million to almost 74 million seniors who will be covered
    under Medicare, and that demographic--simple demographic change
    is certainly a very significant burden particularly since we
    are seeing fewer workers.
        I just want to know if you could in a little time do this:
    Speak to the Republican proposal to end Medicare as we know it
    and to create a voucher program at the same time we will have
    these 74 million seniors in the old--in the current system
    under Medicare, and particularly if the Republicans were
    successful at their second goal, which is to repeal the
    Accountable Care Act and take away all of the cost savings that
    are available potentially. You talked about, Mr. Foster,
    incentivizing payments that would reduce costs and improve
    quality. What does that do to our deficit? Does that not
    explode the deficit over the next 10 to 20 years?
        Mr. Foster. On the latter question, the Affordable Care Act
    clearly had major savings provisions for Medicare in it. We
    estimated the first 10 years a total of $575 billion between
    lower expenditures and/or higher taxes. So if that were
    repealed, you would have to do something else.
        Ms. Schwartz. What about the notion of having this double
    group? I would be interested in knowing your answer to that. My
    time is up.
        Chairman Ryan. Mr. Price.
        Mr. Price. Thank you, Mr. Chairman. And I want to thank the
    witnesses as well for enlightening us today.
        Our colleagues on the other side of the aisle and Ms.
    Schwartz just stated as well, talked about our desire to end
    Medicare. The fact of the matter is what our proposal does, as
    you all well know, is to save Medicare, and she categorizes it
    as a voucher program. As you also know, it is not a voucher
    program at all. It is program of premium support, which is
    remarkably different. In fact, it is something that was
    actually proposed toward the end of the Clinton administration
    by friends of folks on the other side of the aisle.
        I want to ask a number of questions. First I want to follow
    up on Mr. Campbell's line, Mr. Foster, about the 5 straight
    years of this Medicare warning that has been issued, and at the
    end--when have you 2 of those years in a row, then it is the
    obligation, is it not, of the President to then make some kind
    of recommendation about how you get out of this situation of
    having Medicare in such dire financial straits, correct?
        Mr. Foster. Yes, sir. Section 802 of the Medicare
    Modernization Act puts in a requirement for the President to
    recommend ways to address----
        Mr. Price. And have you received any recommendations from
    this President on that?
        Mr. Foster. Not to my knowledge.
        Mr. Price. Thank you.
        You also stated in your testimony that the Medicare
    payment--quote, ``the Medicare payment may be inadequate,''
    unquote, as it relates to physicians and other providers. As a
    physician we talk about numbers all day long, but what happens
    when Medicare payments are inadequate?
        Mr. Foster. We would like not to find out. But as you can
    imagine, especially in your situation, but any of us, if we
    have a job, if we are paid a certain amount for the services or
    the goods we provide, and what we are paid ends up not being
    adequate to keep us in business, then we are going to go out of
    business or turn our business elsewhere. So the potential
    access problems could be very serious. I mean, we see with the
    Medicaid program, of course, in some States the payment rates
    particularly for physicians are quite low, and access to care
    is quite a problem.
        Mr. Price. So the access that patients have to physicians
    may be markedly limited.
        Mr. Foster. Well, if the 30 percent reduction went through,
    for example, come January 1st, I think there would be a
    noticeable reaction, very noticeable.
        Mr. Price. We had Secretary Sebelius here yesterday to talk
    about, and other witnesses to talk about the Independent
    Payment Advisory Board, the IPAB, which I think I believe is a
    ``denial of care'' board to seniors. Isn't it true that the
    largest hammer that they have is to deny payment to physicians
    for services that are being proposed to be rendered or have
    already been rendered; is that correct?
        Mr. Foster. They have the authority to make recommendations
    for payment rates, not just for physicians but for other
    providers as well. They can do some other things in addition,
    but the other ones are less clear as to their effect.
        Mr. Price. But they have the authority--would have the
    authority to deny payment for a certain service or a certain
    procedure?
        Mr. Foster. That I am not so clear about. In other words,
    there is language in the law that governs what kinds of
    recommendations they can make and not make. In terms of a
    specific procedure, for example, they clearly can't deny care
    for the treatment of heart disease. Could they deny care for a
    particular method of treating heart disease that they deem to
    be of little value? That I don't know.
        Mr. Price. I think that is the case. So that patients and
    physicians would no longer be the ones making the decision
    about whether or not that occurs, it would be this Board. Now
    if in fact the Board denied payment for a service, then isn't
    that the same kind of thing that you referred to earlier, which
    is when the Medicare payment is inadequate?
        Mr. Foster. Well, in this hypothetical you get the same
    result. The whole point of Medicare is to provide health care
    to older people and disabled people.
        Mr. Price. In my few brief seconds left, I just want to
    touch on your report that you have offered here, currently
    assumes the effects of the health reform bill passed last year
    on Medicare, correct?
        Mr. Foster. Yes. The current law projections assume all
    current elements in current law.
        Mr. Price. And under these assumptions when the Medicare
    Part A Trust Fund be exhausted?
        Mr. Foster. Under current law the Part A would be exhausted
    in year 2024.
        Mr. Price. So the program itself right now is unsustainable
    under current law, and changes are necessary?
        Mr. Foster. Yes. Certainly the Part A part, and you can
    argue and have a fun time with the other parts.
        Mr. Price. Thank you.
        Chairman Ryan. Mr. Blumenauer.
        Mr. Blumenauer. Thank you. I'm just following up on what
    Dr. Price was talking about where there may be some decision
    about certain procedures for heart treatment that conceivably
    could be restricted or modified in some form. Isn't that what
    happens with private insurance right now? Doesn't private
    insurance set standards about what they will reimburse? They go
    over doctor billings, they don't cover every procedure that a
    patient or a doctor may want? Isn't that the case?
        Mr. Foster. I would say that is correct, not only for
    Medicare but also Medicaid and for private health insurance.
        Mr. Blumenauer. I want to clarify that that is not unique
    to government. Private insurance sets standards about they
    negotiate rates or they disallow some treatment if they don't
    think it is effective or it is not within the scope. Isn't that
    what happens every single day?
        Mr. Foster. Every payer of health care has medical review
    boards that decide what things are covered and payable and what
    things are not. Very few things are denied, I might add. Yeah,
    I will stick with that.
        Mr. Blumenauer. We will have some fun with that later.
        Mr. Foster. Okay.
        Mr. Blumenauer. Insurance companies do set rates, they
    allow some things, they deny others. But let's--I want to get
    to the notion here, you and I have talked before, you think
    that some of the things that is in the Affordable Care Act is
    not sustainable politically. I find it interesting that the
    cuts that would take--the burden that would be assumed from day
    one, where it is all of a sudden 60 percent of the premium
    liability increasing over time in terms of the dollar, out of
    dollar pocket, is equally unsustainable, maybe more so, but we
    have difficulty evaluating that.
        I want to get to one area where I think your expertise
    should be undeniable, and that is looking at trend lines. Now,
    Mr. Ryan said that there were some periods that you could pick
    that showed that it might be higher or lower. My understanding
    is for the last 40 years private insurance premiums have been
    going up 9.3 percent, on average.
        Mr. Foster. I can check that figure for you.
        Mr. Blumenauer. Would you please?
        Mr. Foster. I don't know the answer off the top of my head.
        Mr. Blumenauer. My question is how is that sustainable? I
    would love to see a chart from you about what would happen if
    we are going to load all our senior citizens into the private
    insurance market. But we just take the trend line for the last
    40 years where it is above inflation, it is significantly above
    the increase in productivity of what we have had in the past or
    anybody thinks we are going to have in the future, and I would
    like you to chart what that looks like in 2075. If we are going
    to put all our eggs in that basket, if we could just have one
    chart that shows, given a rate of the last 40 years of what
    private insurance premiums or health care costs are going to be
    in 2075 compared to inflation and compared to increase in
    national productivity.
        Mr. Chairman, I am going to suggest that that chart is
    going to be very vivid. I mean, you throw things up over time
    about our entitlements aren't sustainable. No quarrel. But the
    path we are on now is worse. And if we are going to play that
    game, I think we ought to at least look at what it is going to
    be in 2075 if, absent the efforts in the Affordable Care Act,
    which used to be bipartisan to control cost--and I think
    ultimately we will do this when we get through the games over
    the next 2 or 4 years--but just model your plan, entire private
    sector based on 40 years' experience, compared to the increase
    in productivity. And I think that that is not on the charts
    that you give us, and I think it is going to be a very vivid
    portrayal of why wishing away the dynamic that we have all been
    wrestling with for 40 years, and politicians have blinked time
    and time again, and they will on SGR, that is why we have an
    iPod or whatever it is, to try and stiffen----
        Chairman Ryan. This is an iPod.
        Mr. Blumenauer. Excuse me. IPap, I guess it is, because I
    think this is an iPad. But I think that will be a very vivid
    illustration of why--my time is up. Okay.
        Chairman Ryan. I was into this.
        Mr. Blumenauer. So was I, so was I. I appreciate the
    correction of the terminology.
        Chairman Ryan. Mr. Lankford.
        Mr. Lankford. It would be interesting to note as well, how
    much of a cost shift there has been because of the lower
    reimbursement rates of Medicare, that they to pick up
    additional in the private insurance market, and how the private
    insurance market is not only paying their tax for Medicare but
    also paying as well an additional amount in their insurance
    rates to help cover the costs of Medicare. But we will be able
    to track that as well from there.
        Let me ask you a question about Social Security. You made a
    very stark statement, Mr. Goss, about the disability. 2018 is
    very, very close. The stats I was looking at show that
    disability has grown, from 1990 to the present, by 420 percent
    with this very rapid rise in disability. Can you tell me why
    that we have this rapid rise?
        Mr. Goss. Well, in fact the disability insurance program is
    in a sense a preview of what is going to be happening to our
    retirement portion of the program. The baby-boom generation--
    and we talk about the baby-boom generation as the baby boom
    principally because the birth rates dropped so much after them.
    If birth rates had stayed higher they wouldn't look so much
    like the boom. But the fact that we have the baby-boom
    generation, born 1946 through 1965, they in fact are people who
    are I think today between ages 44 and 65. Those are precisely
    the ages at which we have the bulk of our people receiving
    disability insurance benefits now. So we are right now sort of
    at the apex or at the height of the point where the baby-boom
    generation is creating the surge, the highest level, arguably
    relatively speaking, for disability insurance costs. The rate
    of growth in disability insurance should be expected to be
    slower in the future and an aggregate level in percentage of
    GDP.
        Mr. Lankford. Do you have an idea when that slows down?
        Mr. Goss. That should be slowing down just in the next
    couple of years. Actually our incidents rates of disability on
    an age/sex-specific basis has not been growing that much. It is
    largely that our population under 65 has been shifting, because
    of the baby boom, towards being many more in the ages that are
    prime disability.
        Mr. Lankford. This is very helpful. Thank you.
        Let me ask you a question, Mr. Foster. I am still trying to
    wrap my head around the estimates currently that we are facing
    with 2024 insolvency of Part A. That assumes, to get that
    number, we have to cut doctors' reimbursement 30 percent or
    just not fix it, basically, on this 30 percent amount.
        Mr. Foster. If could I jump in?
        Mr. Lankford. Sure, please do.
        Mr. Foster. Slight correction. Physician payments come out
    of the Part B accounts.
        Mr. Lankford. I'm sorry.
        Mr. Foster. So it doesn't affect Part A.
        Mr. Lankford. Okay. So then you said there is a reduction
    in payments in the Affordable Care Act. How does that involve
    the Part A?
        Mr. Foster. It affects all Part A providers and will reduce
    their rate of growth in the payment updates each year by about
    1.1 percent per year. So instead of an update of maybe 3.3
    percent, it might be 2.2 percent.
        Mr. Lankford. I was in a meeting in June with Secretary
    Geithner, and we were going through some of the specifics of
    the President's proposal to do savings in different areas.
    Obviously we have a major need for that. One of the proposals
    that he stated specifically was $100 billion in savings in the
    next 10 years in Medicaid through lowering the reimbursement
    rates, doctors and hospitals, and also some flexibility in the
    States. And then $250 billion in savings in Medicare in
    addition to what is being done by lowering the reimbursement
    rate to doctors, hospitals, and drug providers.
        Now, that statement was fairly stark to me based on some of
    the statements that you just made, saying that you are not sure
    it is sustainable now, both for B and dropping reimbursements
    for physicians 30 percent in A, and lowering reimbursements in
    the payments that are happening, and then an additional $250
    billion in reducing reimbursements. Do you think that is
    sustainable? What do you think the consequences of that would
    be?
        Mr. Foster. On the physicians' side, I think it is quite
    clear. I mean I won't ask for any volunteers in here, but I am
    sure nobody would raise their hands and say, Let's cut the
    payment rates for physicians by 30 percent. So that will be
    changed, I think it goes without question. It is unsustainable
    immediately.
        Now regarding the productivity adjustment, the slower
    payment updates for most other kinds of health care providers,
    that is much more gradual. It is a little over a percent per
    year. And over the long range, as we saw in the charts earlier,
    it accumulates to a very large difference, which is
    disconcerting at best. Over 10 years, it is not to say that
    couldn't work just fine. That remains to be seen. And of
    course, some providers on the margin right now.
        Mr. Lankford. I am going back to your previous comment of
    informing us before something bad happens. I appreciate that.
    And my time has expired.
        Ms. Schwartz. Just a point of information that is true
    under the Accountable Care Act, that we also did increase
    reimbursement for primary care physicians, nurse practitioners
    and PAs, recognizing their lower reimbursement.
        Chairman Ryan. I thank the gentlelady. Mr. Pascrell.
        Mr. Pascrell. I just wanted to follow up, Mr. Chairman, on
    what the gentleman from Oregon was mentioning before, and that
    is that the real cost shift that we are talking about here
    rests with the folks who have no coverage whatsoever and wind
    up in emergency rooms. That is the real cost shift; they wind
    up there. And if we don't recognize that--and Mr. Chairman, I
    tried to ask you a question earlier--I am going to ask it now.
        Chairman Ryan. Your time.
        Mr. Pascrell. I tried to ask you a question earlier about
    your famous chart. You had it up yesterday.
        Chairman Ryan. Chart number 1 or 2?
        Mr. Pascrell. That is the one, right up there.
        About physician payments, if I could get that chart we got
    it up there right now, does this chart--or doesn't this chart
    assume a 30 percent cut to SGR, the sustainable growth rate,
    Mr. Chairman?
        Chairman Ryan. Mr. Foster?
        Mr. Pascrell. Correct?
        Chairman Ryan. Mr. Foster, this is chart 7 in your
    testimony. Do you want to provide him the answer?
        Mr. Foster. Yes, sir, it does.
        Mr. Pascrell. Thank you. Well, don't you think, Mr.
    Chairman, that that is a bit pessimistic and not in line with
    the current reality since we as a Congress in fact----
        Chairman Ryan. I agree.
        Mr. Pascrell [continuing]. I think we mentioned it before.
    We have averted that, these SGR cuts for the last 10 years, and
    are currently working in Ways and Means--you are a member there
    as well--on a long-term fix; isn't that true?
        Chairman Ryan. I think that is right. And I think that is
    why it lends more credence to the appendix that Mr. Foster put
    in his report showing that the true unfunded liability on
    Medicare is more at 37 trillion than not.
        Mr. Pascrell. Well, let me ask you this question, Mr.
    Chairman. Does it take into account the payments that are made
    to doctors for health information technology, electronic
    medical records? Does it or does it not?
        Chairman Ryan. Well, mind you, even if we plug that hole,
    doctors are still getting paid 80 cents on the dollar.
        Mr. Pascrell. What about quality--what about bonuses for
    quality reporting?
        Chairman Ryan. So If you take a look at this chart you will
    see it is at 80 percent and then off the cliff. That cliff is
    the SGR. So let's assume we plug the SGR, the cliff doesn't
    occur, the slope still goes down, but starting at 80 percent.
    So that means instead of paying physicians next year 60 cents
    on the dollar, we plug the hole and pay them 80 cents on the
    dollar. And that still goes down to a lower amount and that
    means then we are moving more toward a $37 trillion unfunded
    liability than a----
        Mr. Pascrell. We are here today to address the problems in
    Medicare and Social Security, Mr. Chairman. I think what we
    need to do is have real detailed explanations about the charts
    that you put up there, we put up there, it doesn't matter who
    puts the charts up. You can't just slide those charts. ``Given
    assumptions,'' what does that mean?
        Chairman Ryan. So the next time we put up the actuary's
    chart, we will tell you we are putting up the actuary's chart.
        Mr. Pascrell. I didn't ask you that.
        Chairman Ryan. See the source down there, actuary?
        Mr. Pascrell. Mr. Foster, at yesterday's hearing on the
    IPAB, one of my colleagues attributed Medicare's insolvency to
    the Democratic plan. I just want to make clear what creates
    solvency problems and what does not. Health care reform which
    is fully paid for is not to blame for Medicare's solvency.
        Chairman Ryan. Would the gentleman yield on that point?
        Mr. Pascrell. Sure.
        Chairman Ryan. So if we are to assume what you say, that
    these cuts will never occur, then your health care bill is not
    paid for.
        Mr. Pascrell. We know that the health care bill is paid
    for, we----
        Chairman Ryan. Well, no, you are saying it is paid for.
        Mr. Pascrell. We painfully laid it out very clearly.
        Chairman Ryan. Can't have it both ways.
        Mr. Pascrell. And very different from what----
        Chairman Ryan. Either these cuts do not occur and it is not
    paid for, or the cuts do occur and is paid for.
        Mr. Pascrell. Reclaiming my time.
        Mr. Van Hollen. Would the gentleman, yield?
        Mr. Pascrell. Just making one point. Very different from
    what you did in your prescription drug plan of 8 years ago, we
    didn't pay for anything.
        Chairman Ryan. May I ask you a question?
        Mr. Pascrell. Didn't pay for anything.
        Chairman Ryan. Would you yield?
        Mr. Pascrell. Sure.
        Chairman Ryan. If these cuts do not occur, then your bill
    is not paid for. If these cuts do occur, then on paper your
    bill was paid for and this happens.
        Mr. Pascrell. This is my point, this is my point. Look, we
    are trying to provide services to people, we are trying to
    provide those services for everybody. But you refer, you know,
    refer to tax cuts. Many of the gentlemen on the other side and
    ladies refer to tax cuts. We know that the deficit that we are
    addressing--and you are not going to respond to the deficit and
    you are not going to clear up the deficit by blaming Social
    Security or Medicare or the recipients of those benefits.
    Three-fifths of the deficit by 20----
        Chairman Ryan. I will let you----
        Mr. Pascrell. Let me finish.
        Chairman Ryan. Go ahead and finish. You are beyond your
    time. But since I took some of it go ahead and wrap it up.
        Mr. Pascrell. I appreciate it very much, Mr. Chairman. You
    are very kind to me today.
        Chairman Ryan. Don't push it, come on.
        Mr. Pascrell. I said today.
        The tax cuts of 2001 and 2003 are going to mean by 2019--
    and you like figures, Mr. Chairman.
        Chairman Ryan. All right. I got where you are going.
        Mr. Pascrell. You dig figures. By 2019, three-fifths of the
    deficit will be as a result of the extended tax cuts that you
    supported, you voted for, and you think will bring us to the
    promised land.
        Chairman Ryan. We can go on and on and on. Ms. Black.
        Mr. Pascrell. It is not going on and on; it is the truth.
        Mrs. Black. Thank you, Mr. Chairman. And thank you,
    panelists, for being here today.
        Mr. Foster, I would like to turn to the issue of how income
    is calculated for the Federal health programs. And I know that
    this issue was mentioned in the Energy and Commerce hearing
    where you testified. I hope that you might be able to help
    elaborate for this committee the implications for including the
    MAGI, or what they call the Modified Adjusted Gross Income,
    which was created by the Affordable Care Act, and specifically
    by requiring States to use the modified adjusted gross income
    as defined in the Internal Revenue Code.
        Mr. Foster. Yes, ma'am. I would be glad to do that. This
    has to do with the expansion of the Medicaid program under the
    Affordable Care Act and the creation of the health insurance
    exchanges. You need to have a consistent definition of income
    to determine eligibility for Medicaid and the level of your
    exchange Federal subsidies to avoid any gaps or overlaps.
        So to handle that, Congress chose to use the definition of
    modified adjusted gross income for this purpose is readily
    available. The problem is that for many or most Social Security
    beneficiaries, little or none of their Social Security benefits
    are included in adjusted gross income, which is the first step
    in determining the modified version.
        So as a result, if you have Social Security beneficiaries
    under 65 who don't qualify for Medicare yet, and that is a lot
    of them, then the income test for them is not up to 133 percent
    plus 5 percent of income, of all income. It leaves out their
    Social Security benefits in many cases, and in some examples we
    have done, the test can actually be more like 300 to 400
    percent at the extreme, which is probably not intended.
        Mrs. Black. And given that--and I know yesterday, or maybe
    Monday, was when the initial rulemaking for the State exchanges
    did come out. And so I know this may be a little bit difficult
    for you to answer, but I am interested to hear the effects on
    the State exchange premium, credits, and the cost sharing
    subsidies, and Medicaid. What do you think the effect of this
    is going to be on the States?
        Mr. Foster. For the states you have the issue of their
    portion of the cost for Medicaid, of the expansion. Of course,
    for the first 3 years the Federal Government pays the entire
    cost for the expansion population, and then it grades down to
    90 percent, if I remember correctly.
        On the exchanges you still have an issue of the
    eligibility, in the following sense. If you have somebody and
    you include their Social Security benefits in their total
    income, and on that basis they would qualify, say, for a given
    level of premium assistance, in cost-sharing assistance, but
    now you don't count their Social Security benefits, they will
    qualify for a higher level because they look more low income,
    so it shifts people on that eligibility curve and puts them
    into brackets where they get a greater subsidy.
        Mrs. Black. And I have heard this could be 3 to 5 million
    more individuals who could be added to Medicaid by 2014. I have
    estimates from CBO that closing this loophole that was created
    by the Affordable Care Act could save well over 10 billion over
    10 years.
        And that is why I have legislation that I am going to be
    introducing early next week to establish a formula in the
    revenue code that accurately reflects an individual's
    eligibility for certain healthcare-related programs and that is
    in line with the eligibility requirements for other government
    programs such as SSI, SNAP, TANF and unemployment insurance, to
    hopefully get at this loophole, to close it so that the States
    will not be terribly affected, and that it will be a more fair
    system, as I say, in those other programs.
        And so the bill would ensure that health care programs are
    available to those who need it the most, rather than it going
    to people who may be outside of that because of this loophole.
    The bill also would be about ensuring fairness, as the health
    care law is now written, and some individuals would get a
    significant break on their health care premiums, so making this
    a fairness issue is where I am hoping to go with this bill that
    we close this loophole.
        Do you have any comments in my few, 8, 7 seconds left on
    this?
        Mr. Foster. I try to stay out of policy issues, but this is
    one where I think the change is in order.
        Mrs. Black. Thank you, I yield back my time.
        Chairman Ryan. Ms. Wasserman Schultz.
        Ms. Wasserman Schultz. Thank you, Mr. Chairman. My first
    question of Mr. Goss on the Social Security privatization in
    the Ryan plan. What the Ryan plan does is it proposes to set up
    private accounts by diverting Social Security payroll taxes.
    What was your estimate of the cost of diverting those payroll
    contributions?
        Mr. Goss. Thank you. We did--this is a year or 2 ago when
    we did the last version of the road map. And there were a
    number of changes in that that would actually lower the
    scheduled level of Social Security benefits. The amount of
    payroll tax contributions that would be redirected--we
    estimated over the 75-year period at 1.74 percent of payroll--
    would be redirected to the personal accounts.
        Ms. Wasserman Schultz. Now, the Ryan plan offset that
    increase cost to Social Security through its benefit cuts under
    progressive price indexing; is that right?
        Mr. Goss. In part. I think it might be a more appropriate--
    to look at the way the Ryan road map worked was first to effect
    a reform to the Social Security structural program itself in
    that three basic components.
        Ms. Wasserman Schultz. And that reform was a privatization
    of Social Security?
        Mr. Goss. Well, there were first of all just the basics of
    the Social Security program as we know it, without the
    privatization assets, set the progressive price indexing, a
    change in the normal retirement age, and the additional revenue
    from the taxation.
        Ms. Wasserman Schultz. Personal account is the equivalent
    of privatization.
        Mr. Goss. But personal accounts were also included and
    money was taken out of trust funds to fund the personal
    accounts, but then people who participated in that would have a
    reduction in the benefits they would subsequently receive.
        Ms. Wasserman Schultz. So there would be a reduction in
    benefits that individuals would personally receive under that
    plan?
        Mr. Goss. For those, absolutely, yes.
        Ms. Wasserman Schultz. Yes, okay.
        Chairman Ryan. Would the gentlelady yield for a quick
    question?
        Ms. Wasserman Schultz. You are pretty rigid about holding
    to the 5 minutes, Mr. Chairman, so----
        Chairman Ryan. Okay. There is a guarantee that you don't
    lose money if you put it in----
        Ms. Wasserman Schultz. Mr. Chairman, I didn't yield. If you
    give me time beyond the 5 minutes then I would be glad to
    yield. Thank you.
        Chairman Ryan. All right.
        Ms. Wasserman Schultz. Moving on, it really deeply concerns
    me, your response deeply concerns me that there is a plan on
    the table that has been proposed by the chairman repeatedly,
    that an expert acknowledges would reduce benefits, would
    actually jeopardize the long-term solvency, create an
    insolvent--does not address the long-term solvency problems we
    have with Social Security, and risk the safety net that is
    clearly in place now for Social Security beneficiaries.
        I am particularly concerned about the impact on women,
    because--sorry to the men in the room, but women generally live
    longer than men so there is a greater need for Social Security
    benefits to be in place. The average Social Security benefit is
    about $12,000 a year to help an individual keep a roof over
    their head, pay for their prescriptions, and that is needed
    even longer for women. So at the end of the day, to me it is
    very troubling that there would be a plan on the table that
    would privatize Social Security.
        Let me turn to Medicare in my final about minute-and-a-
    half. Mr. Foster, Republicans have said they want to reduce the
    costs for seniors, but I don't know how they can say that with
    a clear conscience when the Affordable Care Act does reduce
    costs for seniors, and the Ryan plan actually adds $6,000 or
    more in costs to Medicare beneficiaries.
        Just to review what the Affordable Care Act does, it
    reduces the out-of-pocket costs for fee-for-service Medicare
    beneficiaries, Part B premiums declined by more than $200 per
    beneficiary by 2019, coinsurance declined by more than $200 per
    beneficiary by 2019. And although Part D beneficiaries see a
    slight increase in premiums, isn't it right that that is
    actually offset by the closing of the doughnut hole and the
    actual reduction in the amounts of the out-of-pocket costs for
    seniors?
        Mr. Foster. For the Part D beneficiaries, that is correct.
        Ms. Wasserman Schultz. Thank you, Mr. Chairman, I yield
    back.
        Chairman Ryan. Mr. Huelskamp, will you yield 30 seconds?
        Mr. Huelskamp. Absolutely, Mr. Chairman.
        Chairman Ryan. Mr. Goss, can you just quickly answer
    questions about the bill I sent you 2\1/2\ years ago? Number
    one, does it make Social Security solvent? Number two, does it
    raise the minimum benefits to keep every senior out of poverty?
    Number three, does it have a benefit guarantee for those people
    who elected to have those voluntary personal accounts?
        Mr. Goss. Yes, it does result in solvency. There is a
    minimum--a low-earner benefit enhancement, and as for the
    guarantee in the form we scored most recently, there is a
    guarantee that personal account would accumulate by retirement
    with a non-negative real return. It would not yield less than
    CPI.
        Chairman Ryan. Thank you, Mr. Huelskamp.
        Mr. Huelskamp. Thank you, Mr. Chairman.
        Mr. Van Hollen. If could just ask a question on that really
    quickly.
        Chairman Ryan. It is Mr. Huelskamp's time.
        Ms. Wasserman Schultz. Mr. Chairman, I had 40 seconds left
    that I would be glad to yield to the ranking member.
        Mr. Van Hollen. Okay.
        Mr. Huelskamp. Thank you, Mr. Chairman. And I believe I
    have a chart, if you would put up my chart from staff. Yes, the
    chart is up there.
        Yesterday I was particularly disturbed as were many
    constituents by a statement the President of the United States
    made. And the question would be to Mr. Goss. And it said
    something to the effect from the President that ``I cannot
    guarantee that those checks go out on August 3rd if we haven't
    resolved this issue. It is in reference to Social Security
    checks and it is in reference to the debt ceiling issue.
        Looking at a chart that was ``Source, U.S. Treasury,
    prepared by GS Global ECS Research.'' And I wonder if you can
    explain to me how the checks would not go out on August 3rd.
    Under what circumstances would Social Security checks be
    withheld?
        Mr. Goss. I wish I could give you a definitive answer to
    that. I think you would have to talk to people at the
    Department of Treasury, quite frankly. What we know and
    understand is that whenever we pay any money out of the Social
    Security Trust Funds, we must redeem bonds. When we redeem
    bonds, that actually lowers the amount of debt subject to the
    ceiling. However, in order to pay the benefits, the Treasury
    must at the same time then issue bonds to the public, which
    therefore increases the debt subject to the ceiling.
        So there is in effect kind of an offset between the two.
    The exact mechanism by which that happens is very complicated,
    and it is the Department of Treasury, and for a public debt you
    have to speak to that issue.
        Mr. Huelskamp. Thank you. I appreciate that. So you are not
    familiar with how the Department of Treasury manages their
    resources in terms of paying Social Security checks?
        Mr. Goss. We are to a degree, but there are many detailed
    intricacies about how exactly it is handled with respect to the
    timing of the redemption of the Social Security bonds, and then
    the issuance of debt to the public, and whether or not that
    process, if not done exactly simultaneously, would in fact
    breach the debt ceiling if we were already added is, I think,
    really the issue.
        Mr. Huelskamp. I appreciate that. And for members of the
    committee, if we take a look at that chart--and this is
    cumulative cash flows--and the line is the receipts; and you
    see throughout the end of the month of August, that line of
    receipts exceeds our expenses, including essential defense,
    Medicare, Social Security interests, and then the receipts
    line.
        I was trying to figure out, and I guess we will have to ask
    the Department of Treasury, which we are having difficulty
    getting answers from them. Buy I see under no circumstances,
    unless it was a political decision, that the administration
    would refuse or withhold Social Security checks because there
    are sufficient receipts. And I appreciate the opportunity to
    make that statement.
        I wish we could have a little more information. Folks at
    the Social Security Administration--have they asked that
    question? You are going to be asked, When do you cut those
    checks and when are you told not to cut those checks?
        Mr. Goss. The responsibility of the Social Security
    Administration per se, my boss, Commissioner Astrue, is to in
    fact determine how much in the way of benefit payments people
    are supposed to receive. We send that information actually over
    to the Department of Treasury. They are the ones that actually
    send out the payments, electronic funds transfer or checks.
        Mr. Huelskamp. Can I ask you to ask the Treasury
    Department, because the administration just really does not
    want to provide information. When you stand on the evening news
    and make a statement that 40-some million Americans are not
    going to receive their checks, could you ask the administration
    are they planning on withholding those checks, and is there a
    reason they wouldn't make those payments on August 3rd?
        Mr. Goss. I would be happy to join you in raising that
    question.
        Mr. Huelskamp. Thank you. I yield back the balance of my
    time.
        Mrs. Black [presiding]. Ms. Castor, you are recognized.
        Ms. Castor. Thank you, Madam Chair. While Social Security
    is not a driver of the deficit and it is not an immediate
    crisis, I think hopefully we can all agree that it is vitally
    important to work together to strengthen the Social Security
    Trust Fund.
        Mr. Goss, do you know when I talk to folks at home, you
    know what they are most surprised to learn when you are talking
    about the basics of Social Security? They are surprised to
    learn that Americans pay into Social Security, but only up to
    $106,000, 106,800 and anything higher than that is exempted. I
    think I heard you share with Ms. Schwartz earlier that that cap
    has been adjusted over time. Can you kind of lay out the
    changes in that taxable maximum over the past couple of
    decades?
        Mr. Goss. I believe it is since about 1978 to 1980 we have
    enacted into the law, you enacted into law, an automatic
    adjustment mechanism for this taxable maximum amount. And it
    grows with the average wage in the U.S. economy, which we
    project will be at about a 4 percent average annual rate in
    future. So the taxable maximum does grow at that rate. It has
    grown at that rate over the historical period.
        There was a comment earlier, though, about the percentage
    of all earnings in the U.S. economy that are covered under
    Social Security and the percentage of those earnings that in
    fact are subject to our payroll tax--that is, the 106,800--that
    is currently around 84 percent. We expect by the year 2020 to
    be around 83 percent. It did reach a high water mark in recent
    history of about 90 percent back in 1983 and 1984.
        Now, the fact it has drifted down is due to a widely known
    and understood phenomenon in our economy that there has been a
    dispersion of earnings, meaning that people at the highest
    income levels tend to have a faster rate of increase in
    earnings than at the lower income levels. That has caused a
    shift towards more of the total earnings in the economy being
    above our taxable maximum and that is what has pulled down our
    share of----
        Ms. Castor. That is very interesting, because the other
    thing I hear from folks when you are just talking about the
    basics of Social Security, is that they--folks are very
    interested in making sure the trust fund is healthy and solvent
    and can--I think I am a little younger than a baby boomer, so
    my generation wants it to be around as this baby-boom bubble
    moves through. And they think that, gosh, if you can raise that
    cap, maybe even over time--and the Rivlin-Domenici Commission
    looked at it and others have studied--if you could raise that
    cap over time, is it true we could make the trust fund solvent
    without any change in the retirement age and without any change
    in benefits? Is that right?
        Mr. Goss. Well, the estimates we have done is if we were
    to, as is true with the 2.9 percent Part A Medicare tax, which
    has no limit whatever, it is charged on all earnings at any
    level; if we were to do the same for the 12.4 percent Social
    Security tax, that would generate revenue, in fact, in excess
    of the amount needed to fully finance Social Security benefits
    through the 75-year period, through 2085.
        If, however, we were to give benefit credit for the
    additional earnings that would be subject to tax under our
    current benefit formula, it would fall somewhat short of being
    able to cover the whole 75-year period, but would cover an
    awful lot of the costs.
        Ms. Castor. Thank you. I think that is a smart way to shore
    up the trust fund and strengthen Social Security and keep the
    promise to our older Americans that Social Security is going to
    be there for them.
        On Medicare, Mr. Foster, thank you very much for being
    here. See, when the Medicare Part D was added and came on line
    in 2006, people are very surprised to learn that it wasn't paid
    for, that there was no dedicated funding, no offsets, no
    revenue raisers. And the CBO has estimated that that is going
    to cost us $1 trillion from 2012 to 2021. Do you agree with
    that CBO number?
        Mr. Foster. I am sure it is in the right ball park. I could
    add it up from our own estimates for you.
        Ms. Castor. It is very interesting, as we discuss all of
    the debt policy--the Affordable Care Act, remember, was paid
    for, 575 billion over 10 years; isn't that correct?
        Mr. Foster. Yes, it was.
        Ms. Castor. Yeah, so there's a difference when it comes to
    Medicare and who are the good fiscal stewards of the Medicare
    initiative. That Medicare Part D was added at a time the Bush
    administration was already projecting the largest debt in
    American history. I think that was very poor public policy and
    very poor fiscal policy.
        But there is a proposal that has been introduced by Mr.
    Waxman and Mr. Dingell that could help us shore up, find
    additional savings for Medicare Part D. Are you familiar----
        Mrs. Black. The gentlelady's time has expired.
        Ms. Castor. Let me just highlight to everyone the Medicare
    Drug Savings Act of 2011, H.R. 2190. CBO estimates that we can
    bring in over $112 billion in Medicare Part D, so I highlight
    that to everyone. Thank you very much.
        Mrs. Black. Thank you. The gentleman from Wisconsin, Mr.
    Ribble, is recognized.
        Mr. Ribble. Thank you, Madam Chair. I just would make one
    quick response. You know, if we reduce physician payments from
    80 cents on a dollar to 33 cents on a dollar and raise taxes by
    a trillion dollars, I suppose we could fund some things.
        And so I would like to go back to Mr. Goss to try to
    clarify some of the questions and the follow-up on Mr.
    Huelskamp's line of questioning before. I am trying to get my
    hands around Social Security Trust Fund. Where does the money
    exist? Is it just on a balance sheet someplace, does it just
    show up on a ledger, or is there an account with money in it?
    Where is all this money?
        Mr. Goss. Well, when Social Security or any of the trust
    funds in the Federal sector have excess revenue coming in,
    excess dedicated taxes, that money is in fact received by the
    general fund of the Treasury, and securities which are required
    by law to be interest-bearing securities backed by the full
    faith and credit of the U.S. Government, are then issued to the
    trust funds. The trust funds hold those securities, much as you
    might with a double E bond or a Treasury bond that you have in
    your own position, or folks overseas, for that matter, in terms
    of publicly held debt.
        Actually, interestingly, the debt obligations issued to the
    trust funds are referred to by the Department of the Treasury
    as public debt obligations, but not publicly held debt
    obligations, obviously, but they are referred to as public debt
    obligations. So they are not a pile of dollar bills, obviously,
    anymore than if we go and put $100 in the savings and loan down
    the street, they will go out and invest it or put it to some
    use later.
        What counts is our ability, when we need that money, to be
    able to come and get it back. So far in all of history,
    whenever the trust funds have needed money--and it has been
    ever since 2005 that the DI Trust Fund has needed to be pulling
    money out of the trust fund, it has been there and it has been
    made good.
        Mr. Ribble. If I took and invested money in a bank, and
    they went and invested it someplace else, and I wanted to get
    it back, and they said to me, ``Gee whiz, you can't have it
    back because I have to go borrow it,'' what would that do to
    your confidence about it?
        Mr. Goss. Well, if they said you could not have it back,
    that would be a problem. Actually, I think we had a situation
    like that fairly recently with some of the big banks, and they
    came to the government to bail them out. And in terms of the
    Social Security Trust Funds that is a concern. This is the
    reason that the trust funds are required to invest in interest-
    bearing securities backed by the full faith and credit of the
    government, so that in fact there is thought not to be that
    issue of concerns of being able to get the money when you need
    it. Really, for that to be undone, I think would require an act
    of Congress to say that the money would not be available.
        Mr. Ribble. Okay. In your testimony you said, first, assets
    in a trust fund had been borrowed by the rest of the government
    in lieu of additional borrowing directly from the public--is
    what we are speaking about here, correct? Publicly held debt,
    currently about 10 trillion, is lower than the Federal debt of
    about 14 trillion, solely due to borrowing from the trust
    funds. That $4 trillion, is that just surplus or is that the
    total amount?
        Mr. Goss. Well, the $4 trillion is in fact the accumulated
    amount of excess revenues that have been brought in by the
    trust fund.
        Mr. Ribble. Since the beginning of----
        Mr. Goss. Since the beginning of time in Social Security
    cases since the year 1937, Medicare since 1965. It is the
    excess of revenues that have been brought in with accumulated
    interest that are held in those funds. And in effect had they
    not been brought in that excess, and the rest of the government
    had spent what it spent and taxed what it has taxed, we would
    still have the rest of the government owing somebody $14.3
    trillion. It is just that it would not have 4 trillion of that,
    in effect, borrowed from the trust funds, it would have to all
    be borrowed from the public.
        Mr. Ribble. If that had been the case it would have been
    transparent to the American people, and the President wouldn't
    go on TV and say if we don't raise the debt limit, we can't
    send our Social Security checks out. Is that accurate? If that
    money had in been in--like Al Gore campaigned on a few years
    ago--in a lockbox.
        Mr. Goss. Well, the definition of what exactly a lockbox
    would be has never been clear to me, so I am not sure we can
    exactly answer exactly what would have happened under that
    circumstance.
        Mr. Ribble. But your testimony would imply that it was
    borrowed--not implied, stated--was borrowed by the rest of the
    government in lieu of additional borrowing. So I am assuming
    that the Federal Government views it just to spend on its
    normal activities and basically continue to fund other things
    other than Social Security.
        Mr. Goss. Well, the fact that the non-trust fund programs
    have in fact had, cumulatively, spending of $14.3 trillion more
    than the revenue that they have taken in, does mean that total
    amount of $14.4 trillion has needed to be borrowed. Perhaps a
    convenience that the trust funds were running excesses and
    could shoulder part of that burden.
        Mr. Ribble. Thank you very much and I yield back.
        Chairman Ryan [presiding]. Mr. Tonko.
        Mr. Tonko. Thank you, Mr. Chair.
        Mr. Goss, I listened with interest to the exchange on the
    releasing of Social Security checks, and find it rather amazing
    that we would even entertain the idea of allowing that to
    happen. And it really calls for us to build this consensus and
    respond appropriately.
        Given the barrage of calls for entitlement reform as
    negotiations on the debt ceiling continue, I would like to take
    a moment to return to your testimony, where you gave a very
    helpful explanation of how Social Security funds itself and
    what its impact on the deficit and debt are. We know the simple
    answer is that it has none. Social Security is self-funding and
    has not added one dime to the debt. However, in the face of
    repeated claims to the contrary and the policymaking that is
    now building upon those claims, I think this is an issue worth
    examining in greater detail.
        So could you please indicate for us the total dollar amount
    on in the OASDI Trust Fund, the Social Security Trust Fund as
    you know it to be?
        Mr. Goss. At the beginning of this year the OASI and DI
    Trust Funds on a combined basis held about $2.6 trillion. We
    are right around that, approaching $2.7 trillion.
        Mr. Tonko. So Social Security has about $2.7 trillion in
    the bank. Mr. Goss, you pointed out that Social Security ran a
    cash deficit last year that comes from discounting Social
    Security's interest income. However, given that Social Security
    has $2.5-$2.7 trillion in what was until recently the safest
    investment bank in the world, the program is earning pretty
    substantial interest, and if that interest income is included,
    Social Security income in 2010 totaled $781 billion, while
    outlays totaled 713 billion. Is that accurate?
        Mr. Goss. I believe those would be the correct numbers,
    yes. The total interest credited in trust funds in 2010 was in
    excess of $100 billion.
        Mr. Tonko. Thank you. So if Social Security was a business,
    it would have netted about 70--just shy of $70 billion last
    year. Let me say that in a different way. If Social Security
    were a business, it would have earned well over twice the
    profits of the most profitable corporations in the world. It
    would have earned twice the profits of ExxonMobil who raked in
    about 30 billion in profits. Despite having one of the most
    successful companies on Earth, ExxonMobil gets government
    welfare and receives billions in oil subsidies, approved by
    this body and defended by my Republicans colleagues. It
    contributes more to Federal debt and deficit than Social
    Security ever has or, under current law, ever will.
        And yet our Republican colleagues are demanding entitlement
    reform and pushing forward bills to privatize Social Security
    and cut benefits, while outrightly refusing to cut subsidies to
    big oil. That, I think is rather interesting.
        Mr. Foster, an interesting point for me to examine is this
    line drawn in the sand by the Republican plan to end Medicare.
    At some point you are 55, and you can't climb into the program.
    And the legacy population continues to age without a new
    population entering in. As I see the actuarial world, it is
    that younger population that doesn't consume as much health
    care, that helps balance the pot and maintain the financial
    outcomes and stability of the insurance programs in this
    country, private sector, or Medicare program.
        What is the impact of having this legacy population age
    without any new younger seniors entering into the mix?
        Mr. Foster. On the one hand, if you measure the average
    cost per person under current law versus, as you deem it, the
    legacy population, obviously with a closed group of people who
    get older and older, a greater proportion of them die each
    year, et cetera, their costs per person are going to be much
    higher.
        Mr. Tonko. Right. But what is the impact, then, on the
    program, on the finances of the program? There is no new group
    coming in from whom you are collecting premiums, and perhaps
    using much less in health care and absorbing and costing more?
        Mr. Foster. I am not sure the impact is so different. In
    other words, either way. Current law or this kind of proposal
    for the 55-and-over group, Medicare is still going to pay the
    lion's share of their costs.
        Mr. Tonko. Right. But premiums are held harmless.
        Mr. Foster. That is right.
        Mr. Tonko. So what is the impact if you have no younger
    senior group coming in to absorb some of that ebb and flow,
    what is the impact of a growing, ever-increasing age group?
        Mr. Foster. That is the point I am working towards. For the
    older group, nothing really has changed. We are still paying
    them the same benefits. They are still paying the same premiums
    they would have.
        Mr. Tonko. But who absorbs that cost, the added cost?
        Mr. Foster. So far there there is no added cost.
        Mr. Tonko. The premium is constant, the group is growing
    older, and you are saying per capita they are paying more.
        Mr. Foster. The current law, proposed law, the same people,
    the same cost. It hasn't gone up.
        Chairman Ryan. Thank you. Mr. Guinta.
        Mr. Guinta. Thank you, Mr. Chairman. Thank you both for
    being here.
        Mr. Foster, are you familiar with the Trustee of Trusts
    report that was issued back in May relative to bankruptcy of
    Medicare?
        Mr. Foster. The Medicare Trustees Report? Yes.
        Mr. Guinta. What did that say? If nothing is done, when
    does Medicare go bankrupt?
        Mr. Foster. For trust fund financial status, you have to
    look at each account separately. The Part A Trust Fund is
    projected to run out of assets in 2024. The other two trust
    fund accounts are not projected to run out.
        Mr. Guinta. So 2024 is not that far off, about 12, 13
    years. What we have heard from our friends on the other side of
    the aisle in terms of solutions is either A, that is just false
    information and it is not accurate, which I disagree with; B,
    raise taxes either on beneficiaries or on other folks in order
    to pay for it; or C, do nothing. And I say that because I have
    not seen a plan from the other side to preserve and protect
    Medicare.
        I think we have a responsibility in Congress to preserve
    and protect it. There have been proposals put forward, most
    recently passed by the House of Representatives, that preserve
    and protect Medicare. It doesn't affect anyone who is 55 or
    older. It recognizes and acknowledges that if nothing is done,
    Part A will go bankrupt in about 12 years. It recognizes that
    10,000 baby boomers per day are coming on to the rolls, and
    that doctors each and every day--less and less doctors are
    choosing to accept Medicare patients.
        So there is a fundamental problem in this country with the
    solvency which Congress is charged with fixing. If we did it
    solely on raising the payroll tax--the tax is 2.9 percent
    today, correct? What would it have to go up to?
        Mr. Foster. The tax is 2.9 percent split evenly between
    employers and employees. There is also an additional 0.9
    percent for high-income workers. If you address the Part A
    long-range actuarial deficit just by raising taxes, then the
    tax rate would have to go up to 3.69 percent, starting
    immediately. That is a 24 percent increase.
        Mr. Guinta. So starting immediately, you would have to go
    from 2.9 to 3.69.
        Mr. Foster. Right.
        Mr. Guinta. This is on top of the Affordable Care Act
    increasing taxes half a trillion dollars. This is on top of the
    President of the United States demanding tax hikes for some
    Americans that would exceed 50 percent of their income, 50
    percent, between Federal, State and local. This is on top of
    the 9.2 percent unemployment rate and 18,000--abysmal 18,000
    jobs created in June. That is 360 jobs per State in this
    country.
        Central High School in Manchester graduated 500 people this
    past month. There is a serious problem in this country that is
    not being dealt with by this Congress and by this President.
    And people in this country are frustrated with that. And what I
    think we need to be doing as members of Congress is not looking
    at raising taxes, but finding reasonable solutions to shore up
    Medicare, to shore up Social Security,
        Medicare, right now, we spend in 2010, what, $520 billion
    roughly?
        Mr. Foster. Yes, sir, that is correct.
        Mr. Guinta. What is your estimation that that number will
    increase to in the next 10 years?
        Mr. Foster. Hang on just one moment; 932 billion projected
    for the year 2020.
        Mr. Guinta. We are in that neighborhood. We have 47 million
    eligible Americans today. Do you have a projection of what that
    would go up to in 10 years?
        Mr. Foster. Sure. We have got projections for just about
    everything. Sixty-four million.
        Mr. Guinta. Sixty-four million people. So from 47 to 64,
    but almost a doubling of the cost.
        Mr. Foster. Yes.
        Mr. Guinta. These particular facts have to be acknowledged
    by Congress and real solutions have to be proposed. The House
    of Representatives has put a proposal forward. It came out of
    this committee, passed the House, nothing has been done in the
    Senate. Quite frankly, nothing has been offered on the other
    side. So I would like to hear from the other side some
    solutions and some fact-based positive ideas, rather than
    critique and criticism of the ideas we continue to bring to the
    table.
        I yield back the balance of my time.
        Chairman Ryan. Ms. Bass.
        Mr. Foster. Before we hear from the other side. Let me just
    say we would be very happy to help all of you on both sides in
    your efforts to find solutions.
        Chairman Ryan. You have been exceptionally helpful, we
    appreciate that. Ms. Bass.
        Ms. Bass. I would like to thank the witnesses for taking
    their time out to speak to us today. And also to my colleague,
    Mr. Guinta, I don't want to mispronounce your name.
        Mr. Guinta. Close enough.
        Ms. Bass. If you want to know the ideas from the other side
    of the aisle, the Democrats did offer an alternative budget
    proposal and a balanced approach, which is something that I
    think we could use, especially as we are getting very close,
    aside from the budget, talking about raising the debt ceiling
    as we are getting dangerously close to jeopardizing our
    Nation's credit standing.
        I wanted to ask you a couple of questions. This question is
    for Mr. Foster. Yesterday Secretary Sebelius said that Medicare
    is on a solid fiscal footing because of the Affordable Care
    Act. And on page 6 of the 2011 Medicare Trustee Report it says
    the financial outlook for the Medicare program is substantially
    improved, certainly not without concerns, but improved as a
    result of the changes in the Affordable Care Act.
        So Mr. Foster, I wanted to know how would repealing the
    Affordable Care Act impact Medicare's financial situation?
        Mr. Foster. There were, of course, very many savings
    provisions in the Affordable Care Act for Medicare. We
    estimated a total savings of $575 billion through 2019. If the
    law were repealed outright and retroactively because some of
    these provisions have already taken effect, of course, then we
    would not have those savings.
        Ms. Bass. Okay. Thank you. And I also wanted to associate
    my comments with Mr. Tonko's, who left a little earlier, about
    the--I think we both heard the President's comments yesterday
    in response to the question of if we didn't raise the debt
    ceiling, would we be able to make Social Security payments, as
    opposed to the President wanted to withhold those payments. I
    think when we do reach a balanced approach, we will be able to
    keep the Social Security payments on time.
        Mr. Goss, while my colleagues on the other side of the
    aisle claim that the House-passed budget resolution did not cut
    Social Security, it does indeed cut the agency's funding by
    more than $10 billion over the next 10 years. And I realize
    that, you know, you are the actuary. But I wanted to know your
    opinion, if you could describe what those size cuts would mean
    for the agency as it looks to serve--and you have certainly
    given numerous examples of the growing number of new retirees
    over the same period.
        Mr. Goss. Very, very recently--in fact, my boss, Michael
    Astrue, Commissioner, testified before the Ways and Means
    Committee and indicated the necessity of maintaining sufficient
    administrative budget to be able to fully serve the American
    people. One of the charges that Social Security is working
    very, very hard at is to try to get the backlog for Social
    Security disability applications down, especially as they are
    waiting for administrative law judge determinations. A
    reduction in administrative revenue for the program would of
    course make it much more difficult to do this.
        Ms. Bass. Thank you very much. And I know that those of us
    on both sides of the aisle recognize that we do have to deal
    with our deficit and that cuts are needed. But I think this is
    an example that sometimes you can have cuts that actually
    create more problems for people than solving the situation that
    we are in now.
        Thank you very much for your time.
        Chairman Ryan. That is it? You have plenty of time to
    spare.
        Ms. Bass. I yield my time to Ranking Member Van Hollen.
        Mr. Van Hollen. I think it has been a very, very good
    hearing. Thank you, Ms. Bass. And I appreciate that windfall. I
    don't get many on the Budget Committee.
        Let me just say I think this has again been a very
    important conversation. I just wanted to say what I have said
    in the past, and the chairman agreed. We will have a hearing to
    look at the tax expenditures and revenue. Just a couple of
    points in that regard. The median income of a Medicare
    beneficiary, median income, is $22,500. The median income of a
    Social Security beneficiary, someone over 65, $25,000. Both
    those median-income numbers include their Social Security
    benefit. My understanding is the average Social Security
    benefit is $14,000 a year. So when we talk about these issues,
    let's keep that in mind.
        And that is why it is so important from our perspective to
    have balance and also look at some of the, you know, revenue
    pictures and look at some of the folks who did get big tax
    breaks not that long ago. And again, during the time when the
    Clinton administration--we saw the economy booming and jobs
    created. Thank you, Mr. Chairman.
        Chairman Ryan. The gentlelady's time has expired.
        I will just simply say, when we do entitlement reform we
    know there are limited resources. Those are the people who
    should get the most of the resources as we do this.
        Gentlemen, thank you very much for coming and taking your
    time. We really appreciate it. This hearing is adjourned.
        [Whereupon, at 12:12 p.m., the committee was adjourned.]