[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

                               __________

           Printed for the use of the Committee on the Budget


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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.]

                                  
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