Status of the 

Social Security 

and Medicare 

Programs

A SUMMARY OF THE

2012 ANNUAL REPORTS

Social Security and Medicare

Boards of Trustees

2012
The Social Security and Medicare Trustees Reports as well as

this document, are available at the following addresses:

Social Security (OASDI): www.socialsecurity.gov/oact/tr/2012/index.html

Medicare (HI and SMI): www.cms.gov/reportstrustfunds/

Summary: www.socialsecurity.gov/oact/trsum/index.html

Other information about Social Security benefits and services is available at

www.socialsecurity.gov or by calling toll-free 1-800-772-1213.

Other information about Medicare benefits and services is available at

www.cms.gov or by calling toll-free 1-800-633-4227.
A MESSAGE TO THE PUBLIC:

Each year the Trustees of the Social Security and Medicare trust funds 

report on the current and projected financial status of the two programs. 

This message summarizes our 2012 Annual Reports.

The long-run actuarial deficits of the Social Security and Medicare programs worsened in 2012, though in each case for different reasons. The 

actuarial deficit in the Medicare Hospital Insurance program increased 

primarily because the Trustees incorporated recommendations of the 

2010-11 Medicare Technical Panel that long-run Medicare cost growth 

rate assumptions be somewhat increased. The actuarial deficit in Social 

Security increased largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot 

sustain projected long-run program costs under currently scheduled 

financing, and legislative modifications are necessary to avoid disruptive 

consequences for beneficiaries and taxpayers.

Lawmakers should not delay addressing the long-run financial challenges 

facing Social Security and Medicare. If they take action sooner rather 

than later, more options and more time will be available to phase in 

changes so that the public has adequate time to prepare. Earlier action 

will also help elected officials minimize adverse impacts on vulnerable 

populations, including lower-income workers and people already dependent on program benefits.

Social Security and Medicare are the two largest federal programs, 

accounting for 36 percent of federal expenditures in fiscal year 2011. 

Both programs will experience cost growth substantially in excess of 

GDP growth in the coming decades due to aging of the population and, in 

the case of Medicare, growth in expenditures per beneficiary exceeding 

growth in per capita GDP. Through the mid-2030s, population aging 

caused by the large baby-boom generation entering retirement and lowerbirth-rate generations entering employment will be the largest single factor causing costs to grow more rapidly than GDP. Thereafter, the primary 

factors will be population aging caused by increasing longevity and 

health care cost growth somewhat more rapid than GDP growth.
Social Security

Social Security’s expenditures exceeded non-interest income in 2010 and 

2011, the first such occurrences since 1983, and the Trustees estimate that 

these expenditures will remain greater than non-interest income throughout the 75-year projection period. The deficit of non-interest income relative to expenditures was about $49 billion in 2010 and $45 billion in 

2011, and the Trustees project that it will average about $66 billion 

between 2012 and 2018 before rising steeply as the economy slows after 

the recovery is complete and the number of beneficiaries continues to 

grow at a substantially faster rate than the number of covered workers. 

Redemption of trust fund assets from the General Fund of the Treasury 

will provide the resources needed to offset the annual cash-flow deficits. 

Since these redemptions will be less than interest earnings through 2020, 

nominal trust fund balances will continue to grow. The trust fund ratio, 

which indicates the number of years of program cost that could be 

financed solely with current trust fund reserves, peaked in 2008, declined 

through 2011, and is expected to decline further in future years. After 

2020, Treasury will redeem trust fund assets in amounts that exceed interest earnings until exhaustion of trust fund reserves in 2033, three years 

earlier than projected last year. Thereafter, tax income would be sufficient 

to pay only about three-quarters of scheduled benefits through 2086.

A temporary reduction in the Social Security payroll tax rate reduced payroll tax revenues by $103 billion in 2011 and by a projected $112 billion 

in 2012. The legislation establishing the payroll tax reduction also provided for transfers of revenues from the general fund to the trust funds in 

order to “replicate to the extent possible” payments that would have 

occurred if the payroll tax reduction had not been enacted. Those general 

fund reimbursements comprise about 15 percent of the program's noninterest income in 2011 and 2012.

Under current projections, the annual cost of Social Security benefits 

expressed as a share of workers’ taxable earnings will grow rapidly from 

11.3 percent in 2007, the last pre-recession year, to roughly 17.4 percent 

in 2035, and will then decline slightly before slowly increasing after 2050. 

Costs display a slightly different pattern when expressed as a share of 

GDP. Program costs equaled 4.2 percent of GDP in 2007, and the Trustees project these costs will increase gradually to 6.4 percent of GDP in 
2035 before declining to about 6.1 percent of GDP by 2050 and then 

remaining at about that level. 

The projected 75-year actuarial deficit for the combined Old-Age and 

Survivors Insurance and Disability Insurance (OASDI) Trust Funds is 

2.67 percent of taxable payroll, up from 2.22 percent projected in last 

year's report. This is the largest actuarial deficit reported since prior to 

the 1983 Social Security amendments, and the largest single-year deterioration in the actuarial deficit since the 1994 Trustees Report. This deficit 

amounts to 20 percent of program non-interest income or 16 percent of 

program cost. The 0.44 percentage point increase in the OASDI actuarial 

deficit and the three-year advance in the exhaustion date for the combined 

trust funds reflect many factors. The most significant factor is lower average real earnings levels over the next 75 years than were projected last 

year, principally due to: 1) a surge in energy prices in 2011 that lowered 

real earnings in 2011 and is expected to be sustained, and 2) slower 

assumed growth in average hours worked per week after the economy has 

recovered. An additional significant factor is the one-year advance of the 

valuation period from 2011-85 to 2012-86.

While the combined OASDI program continues to fail the long-range test 

of close actuarial balance, it does satisfy the test for short-range financial 

adequacy. The Trustees project that the combined trust fund assets will 

exceed one year’s projected cost for more than ten years, through 2027.

However, the Disability Insurance (DI) program satisfies neither the 

long-range test nor the short-range test. DI costs have exceeded noninterest income since 2005, and the Trustees project trust fund exhaustion 

in 2016, two years earlier than projected last year. The DI program faces 

the most immediate financing shortfall of any of the separate trust funds; 

thus lawmakers need to act soon to avoid reduced payments to DI beneficiaries four years from now.

Medicare 

The Medicare HI Trust Fund faces depletion earlier than the combined 

Social Security Trust Funds, though not as soon as the Disability Insurance Trust Fund when separately considered. The projected HI Trust 

Fund's long-term actuarial imbalance is smaller than that of the com-
bined Social Security Trust Funds under the assumptions employed in this 

report.

The Trustees project that Medicare costs (including both HI and SMI 

expenditures) will grow substantially from approximately 3.7 percent of 

GDP in 2011 to 5.7 percent of GDP by 2035, and will increase gradually 

thereafter to about 6.7 percent of GDP by 2086.

The projected 75-year actuarial deficit in the HI Trust Fund is 1.35 percent of taxable payroll, up from 0.79 percent projected in last year’s 

report. The HI fund again fails the test of short-range financial adequacy, 

as projected assets are already below one year's projected expenditures 

and are expected to continue declining. The fund also continues to fail the 

long-range test of close actuarial balance. The Trustees project that the 

HI Trust Fund will pay out more in hospital benefits and other expenditures than it receives in income in all future years, as it has since 2008. 

The projected date of HI Trust Fund exhaustion is 2024, the same date 

projected in last year's report, at which time dedicated revenues would be 

sufficient to pay 87 percent of HI costs. The Trustees project that the share 

of HI expenditures that can be financed with HI dedicated revenues will 

decline slowly to 67 percent in 2045, and then rise slowly until it reaches 

69 percent in 2086. The HI 75-year actuarial imbalance amounts to 

36 percent of tax receipts or 26 percent of program cost.

The worsening of HI long-term finances is principally due to the adoption 

of short-range assumptions and long-range cost projection methods recommended by the 2010-11 Medicare Technical Review Panel. Use of 

those methods increases the projected long-range annual growth rate for 

Medicare's costs by 0.3 percentage points. The new assumptions 

increased projected short-range costs, but those increases are about offset, temporarily, by a roughly 2 percent reduction in 2013-21 Medicare 

outlays required by the Budget Control Act of 2011.

The Trustees project that Part B of Supplementary Medical Insurance 

(SMI), which pays doctors’ bills and other outpatient expenses, and Part 

D, which provides access to prescription drug coverage, will remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year’s expected costs. 

However, the aging population and rising health care costs cause SMI 

projected costs to grow rapidly from 2.0 percent of GDP in 2011 to 
approximately 3.4 percent of GDP in 2035, and then more slowly to 

4.0 percent of GDP by 2086. General revenues will finance roughly threequarters of these costs, and premiums paid by beneficiaries almost all of 

the remaining quarter. SMI also receives a small amount of financing 

from special payments by States and from fees on manufacturers and 

importers of brand-name prescription drugs.

Projected Medicare costs over 75 years are substantially lower than they 

otherwise would be because of provisions in the Patient Protection and 

Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act” or ACA). Most of the 

ACA-related cost saving is attributable to a reduction in the annual payment updates for most Medicare services (other than physicians’ services 

and drugs) by total economy multifactor productivity growth, which the 

Trustees project will average 1.1 percent per year. The report notes that 

sustaining these payment reductions indefinitely will require unprecedented efficiency-enhancing innovations in health care payment and 

delivery systems that are by no means certain. In addition, the Trustees 

assume an almost 31-percent reduction in Medicare payment rates for 

physician services will be implemented in 2013 as required by current 

law, which is also highly uncertain.

The drawdown of Social Security and HI trust fund reserves and the general revenue transfers into SMI will result in mounting pressure on the 

Federal budget. In fact, pressure is already evident. For the sixth consecutive year, the Social Security Act requires that the Trustees issue a 

“Medicare funding warning” because projected non-dedicated sources of 

revenues—primarily general revenues—are expected to continue to 

account for more than 45 percent of Medicare's outlays, a threshold 

breached for the first time in fiscal year 2010.

Conclusion 

Lawmakers should address the financial challenges facing Social Security 

and Medicare as soon as possible. Taking action sooner rather than later 

will leave more options and more time available to phase in changes so 

that the public has adequate time to prepare.
By the Trustees:

Timothy F. Geithner,

Secretary of the Treasury,

and Managing Trustee

Hilda L. Solis,

Secretary of Labor,

and Trustee

Kathleen Sebelius,

Secretary of Health

and Human Services,

and Trustee

Michael J. Astrue,

Commissioner of 

Social Security,

and Trustee

Charles P. Blahous III,

Trustee

Robert D. Reischauer,

Trustee
1

A SUMMARY OF THE 2012 ANNUAL SOCIAL SECURITY

AND MEDICARE TRUST FUND REPORTS

Projected long-range costs for both Medicare and Social Security are not 

sustainable under currently scheduled financing and will require legislative action to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers act sooner rather than later, they can consider more 

options and more time will be available to phase in the changes, giving 

the public adequate time to prepare. Earlier action would also help avoid 

adverse impacts on vulnerable populations, including lower-income 

workers and people dependent on program benefits.

What Are the Trust Funds? Congress established trust funds managed 

by the Department of the Treasury to account for Social Security and 

Medicare income and disbursements. The Treasury credits Social Security and Medicare taxes, premiums, and other income to the funds. There 

are four separate trust funds. For Social Security, the Old-Age and Survivors Insurance (OASI) Trust Fund pays retirement and survivors benefits 

and the Disability Insurance (DI) Trust Fund pays disability benefits. 

(OASDI is the designation for the two trust funds when they are considered on a combined basis.) For Medicare, the Hospital Insurance (HI) 

Trust Fund pays for inpatient hospital and related care. The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate 

accounts: Part B, which pays for physician and outpatient services, and 

Part D, which covers the prescription drug benefit. In 2011, 44.8 million 

people received OASI benefits, 10.6 million received DI benefits, and 

48.7 million were covered under Medicare. 

The only disbursements permitted from the funds are administrative costs 

and benefit payments. Federal law requires that all excess funds be 

invested in interest-bearing securities backed by the full faith and credit of 

the United States. The Department of the Treasury currently invests all 

program revenues in special non-marketable securities of the U.S. Government which earn a market rate of interest. The balances in the trust 

funds represent the accumulated value, including interest, of all prior program annual surpluses and deficits, and provide automatic authority to 

pay benefits.

What Were the Trust Fund Results in 2011? Trust fund operations, in 

billions of dollars, are shown below. (Totals may not add due to rounding.) The OASI and SMI Trust Funds each showed a net increase in assets 

in 2011; DI and HI Trust Fund assets declined.

OASI DI HI SMI

Assets (end of 2010) . . . . . . . . . . $2,429.0 $179.9 $271.9 $72.1

Income during 2011 . . . . . . . . . . 698.8 106.3 228.9 301.0

Outgo during 2011 . . . . . . . . . . . 603.8 132.3 256.7 292.5

Net change in assets . . . . . . . . 95.0 -26.1 -27.7 8.6

Assets (end of 2011) . . . . . . . . . . 2,524.1 153.9 244.2 80.7
2

What Were the Components of Trust Fund Outlays in 2011? The following table shows payments, by category, from each trust fund in 2011. 

(Totals may not add due to rounding.)

What Were the Sources of Income to the Trust Funds in 2011? The 

following table shows income, by source, to each trust fund in 2011. 

(Totals may not add due to rounding.)

What is the Outlook for Future Social Security and Medicare Costs 

in Relation to GDP? One instructive way to view the projected cost of 

Social Security and Medicare is to compare the cost of scheduled benefits 

for the two programs with the gross domestic product (GDP), the most 

frequently used measure of the total output of the U.S. economy 

(Chart A). Measured this way, costs for both programs increase substantially through 2035 because: (1) the number of beneficiaries rises rapidly 

as the baby-boom generation retires; and (2) the lower birth rates that 

have persisted since the baby boom cause slower growth of the labor 

force and GDP. Social Security’s projected annual cost increases to about 

6.4 percent of GDP in 2035, declines to 6.1 percent by 2055, and remains 

at about that level through 2086. Under current law, projected Medicare 

cost rises to 5.7 percent of GDP by 2035, largely due to the growth in the 

number of beneficiaries, and then to 6.7 percent in 2086, with growth in 

health care cost per beneficiary becoming the larger factor later in the valuation period.

In 2011, the combined cost of the Social Security and Medicare programs 

equaled 8.5 percent of GDP. The Trustees project an increase to 12.1 percent of GDP in 2035, which then reaches 12.8 percent of GDP in 2086. 

Although Medicare cost (3.7 percent of GDP) was smaller than Social 

Category (in billions) OASI DI HI SMI

Benefit payments . . . . . . . . . . . . $596.2 $128.9 $252.9 $288.5

Railroad Retirement financial 

interchange . . . . . . . . . . . . . . . 4.1 0.5 — —

Administrative expenses . . . . . . 3.5 2.9 3.8 4.0

Total . . . . . . . . . . . . . . . . . . . . . . 603.8 132.3 256.7 292.5

Source (in billions) OASI DI HI SMI

Payroll taxes . . . . . . . . . . . . . . . . $482.4 $81.9 $195.6 —

Taxes on benefits. . . . . . . . . . . . . 22.2 1.6 15.1 —

Beneficiary premiums . . . . . . . . . — — 3.5 $65.4

Transfers from States. . . . . . . . . . — — — 7.1

General Fund reimbursements . . 87.8 14.9 0.5 —

General revenues. . . . . . . . . . . . . — — — 222.8

Interest earnings . . . . . . . . . . . . . 106.5 7.9 12.0 3.2

Other . . . . . . . . . . . . . . . . . . . . . . a

a.Less than $50 million.

— 2.2 2.5

Total. . . . . . . . . . . . . . . . . . . . . . . 698.8 106.3 228.9 301.0
3

Security cost (4.9 percent of GDP) in 2011, the projected gap closes gradually until 2049, when Medicare becomes the more costly program. During the final 10 years of the long-range projection period, Medicare cost is 

about 10 percent larger than Social Security cost.

The projected costs for OASDI and HI depicted in Chart A and elsewhere 

in this document reflect the full cost of scheduled current-law benefits 

without regard to whether the trust funds will have sufficient resources to 

meet these obligations. Current law precludes payment of any benefits 

beyond the amount that can be financed by the trust funds, so the amount 

of benefits that would be payable in years after trust fund exhaustion is 

lower than shown, as described later in this summary. In addition, the projected costs assume realization of the full estimated savings of the Affordable Care Act as well as adherence to Medicare’s sustainable growth rate 

limits. In practice, lawmakers are likely to prevent a large reduction in 

payment rates for physician services that will otherwise take effect for 

2013. Also, as described in the Medicare Trustees Report, the projections 

for HI and SMI Part B depend significantly on the long-range feasibility 

of the various cost-saving measures in the Affordable Care Act—in particular, the lower increases in Medicare payment rates to most categories 

of health care providers. For such efforts to be successful in the long 

range, providers will have to generate and sustain unprecedented levels of 

productivity gains or other improvements in efficiency.

 Chart A–Social Security and Medicare Cost as a Percentage of GDP

0%

2%

4%

6%

8%

10%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

OASI + DI

HI + SMI (including Part D)

Historical Estimated
4

What is the Outlook for Future Social Security and Medicare HI 

Costs and Income in Relation to Taxable Earnings? Since the primary 

source of income for OASDI and HI is the payroll tax, it is informative to 

express the programs’ income and costs as percentages of taxable payroll—that is, of the base of worker earnings taxed to support each program (Chart B).1 Both the OASDI and HI annual cost rates rise over the 

long run from their 2011 levels (13.52 and 3.75 percent). Projected Social 

Security cost grows to 17.41 percent of taxable payroll by 2035, declines 

to 17.07 percent in 2052, and then rises gradually to 17.83 percent in 

2086. The projected Medicare HI cost rate rises to 5.82 percent of taxable 

payroll in 2050 under the intermediate assumptions employed in this 

report, and thereafter gradually increases to 6.28 percent in 2086.

The OASDI income rate—which includes payroll taxes, taxes on benefits, 

and any other transfers of revenues to the trust funds excepting payments 

of interest—is 12.89 percent in 2012 and increases little over time, until it 

reaches 13.33 percent in 2086. Scheduled payroll tax rates remain 

unchanged from their 1990 levels with the exception of temporary reductions in the tax rates for 2010, 2011, and 2012 that are offset by reimbursements from the General Fund of the Treasury. Annual income from 

the other tax source, the taxation of OASDI benefits, will increase gradually relative to taxable payroll as a greater proportion of Social Security 

1 Taxable payroll is larger for HI than for OASDI. See page 12 for further details.

 Chart B–OASDI and HI Income and Cost as a Percentage 

of Taxable Payroll

0%

5%

10%

15%

20%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Income rates

Cost rates

Historical Estimated

OASDI

HI
5

benefits is subject to taxation in future years, but will continue to be a relatively small component of program income.

The projected HI income rate rises gradually from 3.20 in 2012 to 4.32 in 

2086 due to the Affordable Care Act’s scheduled increase in payroll tax 

rates for high earners starting in 2013. Individual tax return filers with 

earnings above $200,000, and joint return filers with earnings above 

$250,000, will pay an additional 0.9 percent tax on earnings above these 

earnings thresholds. An increasing fraction of all earnings will be subject 

to the higher tax rate over time because the new law does not index the 

thresholds.

How Will Cost Growth in the Different Parts of Medicare Change the 

Sources of Program Financing? As Medicare costs grow over time, 

general revenue and beneficiary premiums will play an increasing role in 

financing the program. Chart C shows scheduled cost and non-interest 

revenue sources under current law for HI and SMI combined as a percentage of GDP. The total cost line is the same as displayed in Chart A and 

shows Medicare cost rising to 6.7 percent of GDP by 2086. 

Projected revenue from payroll taxes and taxes on OASDI benefits credited to the HI Trust Fund increases from 1.4 percent of GDP in 2012 to 

1.8 percent in 2086 under current law, while projected general revenue 

transfers to the SMI Trust Fund increase from 1.4 percent of GDP in 2012 

to 3.0 percent in 2086, and beneficiary premiums increase from 0.5 to 

 Chart C–Medicare Cost and Non-Interest Income by Source

as a Percentage of GDP

0%

1%

2%

3%

4%

5%

6%

7%

1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080

Calendar year

Historical Estimated

Payroll Taxes

Premiums

General Revenue

Tax on Benefits

Total Non-Interest Income

Total Cost

State Transfers & Drug Fees

HI Deficit
6

1.0 percent of GDP. The share of total non-interest Medicare income from 

taxes would fall substantially (from 43 percent to 31 percent) while general revenue transfers would rise (from 42 to 50 percent), as would premiums (from 14 percent to 17 percent). The distribution of financing 

changes in part because Part B and D costs increase at a faster rate than 

Part A cost under the Trustees’ projections. By 2086, the Medicare SMI 

program will require general revenue transfers equal to 3.0 percent of 

GDP. Moreover, the HI deficit represents a further 0.8 percent of GDP in 

2086. There is no provision under current law to finance this deficit 

through general revenue transfers or any other revenue source.

The Medicare Modernization Act (2003) requires that the Board of Trustees determine each year whether the annual difference between program 

outlays and dedicated revenues (the bottom four layers of Chart C) 

exceeds 45 percent of total Medicare outlays in any of the first seven fiscal years of the 75-year projection period. In effect, the law sets a threshold condition that signals that general revenue financing of Medicare is 

becoming excessive. In that case, the annual Trustees Report must include 

a determination of “excess general revenue Medicare funding.” Two consecutive reports with such a determination triggers a “Medicare funding 

warning.” The warning directs the President to submit proposed legislation within 15 days of the next budget submission to respond to the warning and requires Congress to consider the proposal on an expedited basis. 

To date, elected officials have not enacted legislation responding to these 

funding warnings which have been included in the five previous reports.

This year’s report projects the difference between outlays and dedicated 

financing revenues to exceed 45 percent of total Medicare outlays during 

fiscal year 2012, prompting a determination of “excess general revenue 

Medicare funding” for the seventh consecutive report, triggering another 

“Medicare funding warning.”

What are the Budgetary Implications of Rising Social Security and 

Medicare Costs? Concern about the long-range financial outlook for 

Medicare and Social Security often focuses on the exhaustion dates for 

the HI and OASDI trust funds—the time when projected trust fund balances under current law would be insufficient to pay the full amounts of 

scheduled benefits. A more immediate issue is the growing burden that 

the programs will place on the Federal budget well before exhaustion of 

the trust funds.

Chart D shows the excess of scheduled outgo over dedicated tax and premium income for the OASDI, HI, and SMI trust funds expressed as percentages of GDP. Each of these trust funds’ operations will exert rapidly 

rising pressure on the Federal budget in future years. General revenues 

pay for roughly 75 percent of all SMI costs. From now through 2024, 

interest earnings and asset redemptions, financed from general revenues, 

will cover the shortfall of HI tax and premium revenues relative to expen-
7

ditures. In addition, general revenues must cover similar payments as a 

result of growing OASDI deficits through 2033.2

In 2012, the projected difference between Social Security’s dedicated tax 

income and expenditures is $165 billion. For HI, the projected difference 

between dedicated tax and premium income and expenditures is $38 billion.The projected general revenue demands of SMI are $217 billion. 

Thus, the total general funds for Social Security and Medicare in 2012 are 

$420 billion, or 2.7 percent of GDP. Redemption of trust fund bonds, 

interest paid on those bonds, and transfers from the general funds provide 

no new net income to the Treasury, which must finance these payments 

through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.

Chart D shows that the difference between cost and revenue from dedicated payroll taxes, income taxation of benefits, and premiums will grow 

rapidly through the 2030s as the baby-boom generation reaches retirement age. This imbalance would result in vastly increased pressure on the 

2 As noted earlier in this summary, if trust fund exhaustion actually occurred as projected for HI in 

2024 and for OASDI in 2033, each program could pay benefits thereafter only up to the amount of 

continuing dedicated revenues. Chart D, by contrast, compares dedicated sources of tax and premium 

income with the full cost of paying scheduled benefits under each program. In practice, lawmakers 

have never allowed the assets of a Social Security or Medicare trust fund to become exhausted.

 Chart D–Projected SMI General Revenue Funding

plus OASDI and HI Tax Shortfalls

[Percentage of GDP]

0%

1%

2%

3%

4%

5%

2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040

Calendar year

SMI (B&D)

HI

OASDI
8

Federal budget if the law were changed to maintain scheduled benefits in 

the absence of an increase in dedicated tax revenues, with such financing 

requirements equaling 4.8 percent of GDP by 2040. 

What Is the Outlook for Short-Term Trust Fund Adequacy? The 

reports measure the short-range adequacy of the OASI, DI, and HI Trust 

Funds by comparing fund assets to projected costs for the ensuing year 

(the “trust fund ratio”). A trust fund ratio of 100 percent or more—that is, 

assets at least equal to projected costs for a year—is a good indicator of a 

fund’s short-range adequacy. That level of projected assets for any year 

suggests that even if cost exceeds income, the trust fund reserves, combined with annual tax revenues, would be sufficient to pay full benefits 

for several years.

By this measure, the OASI Trust Fund is financially adequate throughout 

the 2012-21 period, but the DI Trust Fund fails the short-range test 

because its projected trust fund ratio falls to 83 percent by the beginning 

of 2013, followed by exhaustion of assets in 2016.

The HI Trust Fund also does not meet the short-range test of financial 

adequacy; its trust fund ratio was 90 percent at the beginning of 2012 

based on the year’s anticipated expenditures, and the projected ratio does 

not rise to 100 percent within five years. Projected HI Trust Fund assets 

are fully depleted in 2024. Chart E shows the trust fund ratios through 

2040 under the intermediate assumptions.

The Trustees apply a less stringent annual “contingency reserve” test to 

SMI Part B assets since the overwhelming portion of the financing for 

that account consists of beneficiary premiums and general revenue contributions that are set each year to meet expected costs. Part D financing is 

also set on an annual basis. Moreover, the operation of Part D through private insurance plans, together with a flexible appropriation for Federal 

costs, eliminates the need for a contingency reserve in that account. Note, 

however, that estimated Part B costs are improbably low for 2013 and 

beyond because the projections assume that current law, which substantially reduces physician payments per service under the sustainable 

growth rate system, will not change. The estimated physician fee reduction for 2013 is 30.9 percent. A reduction in fees of this magnitude is 

highly unlikely; lawmakers have acted to prevent smaller reductions in 

every year since 2003. Underestimated payments to physicians would 

affect projected costs for Part B, total SMI, and total Medicare.

What Are Key Dates in OASI, DI, and HI Financing? In 2011, the HI 

fund used interest income ($12 billion) and assets ($28 billion) to help 

finance expenditures. This report anticipates a $38 billion deficit in noninterest income for 2012, followed by a period of declining deficits 

(2013-18) as the growth in taxable earnings accelerates. The projected 
9

trust fund exhaustion date is 2024 (unchanged from last year). Under current law, scheduled HI tax and premium income would be sufficient to 

pay 87 percent of estimated HI costs in 2024 and 69 percent by 2086.

In 2011, Social Security’s cost continued to exceed both the program’s tax 

income and its non-interest income, a trend that the Trustees project to 

continue throughout the short-range period and beyond. The 2011 deficit 

of tax income relative to cost was $148 billion and the projected 2012 deficit is $165 billion. The sizes of these deficits are largely due to a temporary reduction in the Social Security payroll tax for 2011 and 2012. The 

legislation establishing the payroll tax reduction also provided for transfers of revenues from the General Fund of the Treasury to the trust funds 

to “replicate to the extent possible” revenues that would have occurred in 

the absence of the payroll tax reduction. Including these general revenue 

reimbursements, the 2011 deficit of non-interest income relative to cost 

was $45 billion and the projected 2012 deficit is $53 billion. 

The combined Social Security trust funds continue to grow because projected interest earnings ($110 billion in 2012) still substantially exceed 

the non-interest income deficit. The report indicates that annual OASDI 

income, including payments of interest to the trust funds from the General 

Fund, will exceed annual cost every year until 2021, increasing the nominal value of combined OASDI trust fund assets. As noted earlier, how-

 Chart E–OASI, DI, and HI Trust Fund Ratios

[Assets as a percentage of annual cost]

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

1970 1980 1990 2000 2010 2020 2030 2040

Calendar year

OASI

DI

HI

Historical Estimated
10

ever, the trust fund ratio (the ratio of projected assets to costs) will 

gradually decline despite this nominal balance increase, as it has since 

2008.

Beginning in 2021, net redemptions of trust fund assets with General 

Fund payments will be required until exhaustion of these assets in 2033. 

After OASDI trust fund exhaustion, continuing tax income would be sufficient to pay 75 percent of scheduled benefits in 2033 and 73 percent in 

2086. When the programs are considered separately, the projected 

exhaustion dates are 2035 for the OASI Trust Fund and 2016 for the DI 

Trust Fund. Payment of full DI benefits beyond 2016, when tax income 

would cover only 79 percent of scheduled benefits, will require legislation to address the financial imbalance, possibly including a reallocation 

of the OASDI payroll tax rate between OASI and DI.

The following table shows key dates for the respective trust funds.

What is the Long-Range Actuarial Balance of the OASI, DI, and HI 

Trust Funds? Another way to view the outlook for payroll tax-financed 

trust funds is to consider their actuarial balances for the 75-year valuation 

period. The actuarial balance of a fund is essentially the difference 

between annual income and costs, expressed as a percentage of taxable 

payroll, summarized over the 75-year projection period. Premium 

increases and general revenue transfers necessary to bring SMI into 

annual balance occur as a requirement of Federal law so actuarial balance 

is not an informative concept for that program.

The OASI, DI, and HI Trust Funds all have long-range actuarial deficits 

under the intermediate assumptions, as shown in the following table. 

KEY DATES FOR THE TRUST FUNDS 

OASI DI OASDI HI

Year of peak trust fund ratioa . . . . . . . . . . .

a.Dates pertain to the post-2000 period.

2011 2003 2008 2003

First year outgo exceeds income 

excluding interestb . . . . . . . . . . . . . . . . . . .

b.Dates indicate the first year that a condition is projected to occur and to persist annually thereafter through 

2086.

2010 2005 2010 2008

First year outgo exceeds income 

including interestb. . . . . . . . . . . . . . . . . . . . 2023 2009 2021 2008

Year trust fund assets are exhausted . . . . . . 2035 2016 2033 2024

LONG-RANGE ACTUARIAL DEFICIT OF THE 

OASI, DI, AND HI TRUST FUNDS

[Percent of taxable payroll]

OASI DI OASDI HI

Actuarial

Deficit . . . . . . . . . . . . . . . . . . 2.30 0.37 2.67 1.35
11

A useful interpretation of the actuarial deficit is that it represents the percentage points that would have to be either added to the current-law 

income rate or subtracted from the cost rate for each of the next 75 years 

to bring the funds into actuarial balance. The actuarial balance equals zero 

if trust fund assets at the end of the period are equal to the following 

year’s cost. Note that the Trustees project that Social Security’s annual 

deficits, expressed as the difference between the cost rate and income 

rate, will increase gradually from 2017 to 2037, decline slightly during 

2038-52, and then resume increasing through 2086 (Chart B). Increasing 

annual deficits during the final three decades of the projection indicate 

that a single tax rate increase for all years starting in 2012 sufficient to 

achieve actuarial balance would result in large annual surpluses early in 

the period followed by increasing deficits in later years. The relatively 

large deficits at the end of the 75-year projection period—equal to 

4.50 percent of taxable payroll in 2086 (see Chart B discussion)—indicate 

that sustained solvency would require payroll tax rate increases or benefit 

reductions (or a combination thereof) by the end of the period that are 

substantially larger than those needed on average for this report’s longrange period (2012-86).

Projected HI Trust Fund annual deficits gradually decline to 0.08 percent 

of taxable payroll in 2018, then increase to 1.93 percent in 2050 and 

remain at about that level through 2086. 

The financial outlooks for both OASDI and HI depend critically on a 

number of demographic and economic assumptions. Nevertheless, the 

projected actuarial deficit in each of these programs is large enough that 

continued solvency under current-law financing is extremely unlikely. An 

analysis that allows plausible random variations around the intermediate 

assumptions employed in the report indicates that OASDI trust fund 

exhaustion is highly probable by mid-century.

How Has the Financial Outlook for Social Security and Medicare 

Changed Since Last Year? Under the intermediate assumptions, the 

combined OASDI Trust Funds have a projected 75-year actuarial deficit 

equal to 2.67 percent of taxable payroll, 0.44 percentage point larger than 

last year’s estimate. The anticipated asset exhaustion date moves closer 

by three years to 2033. The increased OASDI shortfall is due chiefly to 

changes in economic projections which incorporate new starting values 

and revised assumptions. Had assumptions, methods, and starting values 

remained unchanged from last year’s report, the projected change in the 

actuarial deficit would have been 0.05 percent of taxable payroll, caused 

by the inclusion of 2086 (a year with a large negative balance) in the 75-

year projection period.

Medicare’s HI Trust Fund has a long-range actuarial deficit equal to 

1.35 percent of taxable payroll under the intermediate assumptions, larger 

than the 0.79 percent figure reported last year. Medicare cost projections 
12

are higher principally because the Trustees adopted the 2010-11 Medicare 

Technical Review Panel’s recommended changes in projection assumptions that raised near-term costs and the long-range rate of increase in 

average HI and SMI Part B costs per beneficiary. Nevertheless, the projected date of exhaustion for the HI Trust Fund remains 2024 because the 

higher costs were offset during 2013-21 by a 2-percent reduction in 

expenditures expected under the Budget Control Act of 2011.

Who Are the Trustees? There are six Trustees, four of whom serve by 

virtue of their positions in the Federal Government: the Secretary of the 

Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two Trustees 

are public representatives appointed by the President and confirmed by 

the Senate: Charles P. Blahous III, Research Fellow at the Hoover Institution, and Robert D. Reischauer, President Emeritus of the Urban Institute.

How Are Social Security and Medicare Financed? For OASDI and HI, 

the major source of financing is payroll taxes on earnings paid by employees and their employers. Self-employed workers pay the equivalent of the 

combined employer and employee tax rates. During 2011, an estimated 

158 million people had earnings covered by Social Security and paid payroll taxes; for Medicare the corresponding figure was 162 million. Current law establishes payroll tax rates for OASDI and apply to earnings up 

to an annual maximum ($110,100 in 2012) that ordinarily increases with 

the growth in the nationwide average wage. In contrast to OASDI, covered workers pay HI taxes on total earnings. The scheduled payroll tax 

rates (in percent) for 2012 are:

Note two caveats concerning these rates. The Temporary Payroll Tax Cut 

Continuation Act of 2011 (Public Law 112-78) and the Middle Class Tax 

Relief and Job Creation Act of 2012 (Public Law 112-96) reduced the 

OASDI tax rate for 2012 by 2 percentage points for employees and for 

self-employed workers. Under current law, the employee tax rate reverts 

to the employer rate in 2013. Transfers from the General Fund of the 

Treasury to the OASI and DI Trust Funds compensate for the loss of payroll tax revenue due to the temporary reduction and have no financial 

impact on either trust fund. Furthermore, starting in 2013, the Affordable 

Care Act imposes an additional HI tax equal to 0.9 percent of earnings 

over $200,000 for individual tax return filers, and on earnings over 

$250,000 for joint return filers.

Payments from the General Fund finance about 76 percent of SMI Part B 

and Part D costs, with most of the remaining costs covered by monthly 

OASI DI OASDI HI Total

Employees . . . . . . 3.59 0.61 4.20 1.45 5.65

Employers . . . . . . 5.30 0.90 6.20 1.45 7.65

Combined total. . . 8.89 1.51 10.40 2.90 13.30
13

premiums charged to enrollees or in the case of low-income beneficiaries, 

paid on their behalf by the Medicare or Medicaid. Part B and Part D premium amounts rely on methods defined in law and increase as the estimated costs of those programs rise. 

In 2012, the Part B standard monthly premium is $99.90. There are also 

income-related premium surcharges for Part B beneficiaries whose modified adjusted gross income exceeds a specified threshold. In 2012 through 

2019, the threshold is $85,000 for individual tax return filers and 

$170,000 for joint return filers. Income-related premiums range from 

$139.90 to $319.70 per month in 2012.

In 2012, the Part D “base monthly premium” is $31.08. Actual premium 

amounts charged to Part D beneficiaries depend on the specific plan they 

have selected and should average around $30 for standard coverage. 

Beginning in 2012, Part D enrollees with incomes exceeding the thresholds listed above must pay income-related monthly adjustment amounts 

in addition to their normal plan premium. For 2012, the adjustments range 

from $11.60 to $66.40 per month. Part D also receives payments from 

States that partially compensate for the Federal assumption of Medicaid 

responsibilities for prescription drug costs for individuals eligible for both 

Medicare and Medicaid. In 2012, State payments should cover about 

12 percent of Part D costs.

A MESSAGE FROM THE PUBLIC TRUSTEES

The 1983 Social Security amendments established the public trustee position pursuant to the recommendation of the National Commission on 

Social Security Reform (also known as the “Greenspan Commission”), 

which concluded that the “presence of such public members” would, 

among other things, “help to assure that the demographic and economic 

assumptions for the cost estimates” are developed “in an objective manner.” While the production of the Trustees reports inevitably involves the 

blending of diverse analytical viewpoints, we have found that the differing 

perspectives are consistently offered in ways that fulfill the Commission's 

stated goal. Once again we have been impressed, in this our second year 

as Public Trustees, by the professionalism and objectivity of the ex officio 

Trustees, the Social Security and CMS actuaries, and the supporting 

staffs.

The formal Social Security and Medicare Trustees Reports have always 

been long and complex. This year the Trustees, led by the Commissioner 

of Social Security, together with their dedicated staffs put a great deal of 

effort into making them more understandable. We believe the language of 

this year's reports is much clearer than that of previous years; nevertheless we recognize that there remains room for further future improvement.

This year the Trustees benefited from the analysis and recommendations 

of the Medicare Technical Panel convened by the Department of Health 

and Human Services and the Social Security Technical Panel convened by 

the Social Security Advisory Board. These panels, whose members are 

expert economists, actuaries, and demographers, reviewed the assumptions and methods used by the Trustees. We thank them for their diligent 

and useful work. Our current reports incorporate some, but not all, of 

their recommendations. We intend to continue to draw from their insights 

to inform refinements of our methods for future reports.

In our joint message last year, we warned that both Social Security and 

Medicare face substantial challenges, and opined that elected officials 

will best serve the interests of the public if changes are enacted at the earliest possible time. This year we sound the same warning but with greater 

urgency. The reasons for the increased urgency are somewhat different, 

however, for each program.

The Medicare program’s near-term finances remain qualitatively similar 

to those described in last year's report, while the reported long-term 

financial outlook has grown worse. For example, the Trustees’ new pro-
jection for the date of Hospital Insurance (HI) Trust Fund depletion 

remains 2024 as was projected last year, while the HI program's longterm actuarial deficit has grown significantly—from 0.79 percent of taxable payroll to 1.35 percent (an increase of over 70 percent). Similarly, 

this year's projection for overall Medicare costs in 2035—5.7 percent of 

GDP—is very close to last year's projection of 5.6 percent of GDP, while 

our projection for 2085 has grown from 6.2 percent of GDP to 6.7 percent. The reason for the deterioration in the long-term is primarily methodological, reflecting the incorporation of the recommendation by the 

Medicare Technical Panel that we increase our estimate of long-term 

Medicare cost growth rates.

We do not regard the updated projection as a qualitatively significant further deterioration in the long-term outlook for Medicare, as much as it is 

a methodological refinement that better reflects Medicare cost growth 

factors relative to those for health care generally. We expect to incorporate further methodological improvements to the projections next year, in 

particular a method for basing future health care cost growth projections 

on a new model of factors contributing to growth. We do not currently 

have reason to believe this will cause a qualitative change in our projections.

Although Medicare's near-term outlook has not qualitatively changed 

over the last year, pressure on HI financing is nevertheless increasing. 

The passage of time has brought us one year closer to the program's projected date of trust fund exhaustion, even with the program cost reductions recently enacted in the 2011 Budget Control Act which were not part 

of last year's projections.

This year's report, like previous reports, contains warnings that future 

Medicare costs are likely to be underestimated in the report's intermediate 

projections. The primary reason for this is not methodological but rather 

is due to likely changes to current law. The most immediate among these 

is the near-certainty that lawmakers will override the nearly 31 percent 

cut in physician fee-schedule payments that the current-law Sustainable 

Growth Rate (SGR) formula requires in January 2013.

The Social Security outlook has worsened significantly relative to last 

year's report. The actuarial deficit in its combined trust funds is now 2.67 

percent of taxable payroll, the highest recorded since the last major 

Social Security financing reforms roughly three decades ago. The singleyear deterioration in the 2012 report is the largest recorded since the 
1994 report. While the projected depletion date (2033) for the combined 

trust funds is not the earliest recorded since the 1983 reforms, we are nevertheless now closer to the point of projected depletion than we have been 

since enactment of those reforms. The combined Social Security trust 

funds' balance continues to grow in nominal terms, but has been declining 

generally relative to the total cost of paying benefits since 2008, and will 

be shrinking after 2012 in real (inflation adjusted) terms. Thus by almost 

any objective measure, the financial health of the Social Security system 

has entered a concerning decline.

While there is no way for us to know what mixture of additional tax revenues and restraints on benefit growth will prove to be the most palatable 

means of strengthening Social Security's financial position, lawmakers 

should be aware that it will become increasingly difficult to avoid adverse 

effects on current beneficiaries, those close to retirement, and low-income 

beneficiaries in all birth cohorts if legislative changes are delayed much 

further.

The weak economy of recent years has placed both direct and indirect 

pressure on Social Security. It has placed direct pressure on program 

finances by depressing payroll tax income. Much of the financial deterioration in this year's Social Security report reflects updated economic data 

and assumptions, including weaker-than-expected economic performance 

and unexpectedly high inflation in 2011. But the weak economy has 

placed indirect pressure on the program as well, in that lawmakers have 

relieved workers of part of the tax burden of financing Social Security 

benefits so as to bolster near-term economic growth. Under this policy, 

over $200 billion will be transferred from the General Fund of the Treasury to replace foregone Social Security tax collections. In 2011, due in 

large part to this change in program financing, payroll tax revenue represented only 70 percent of total Social Security income. Lawmakers should 

carefully consider whether continued significant General Fund financing 

for Social Security could threaten to undermine long-standing public perceptions of the program as an earned benefit financed by workers according to contributory social insurance principles.

The legislative achievement in creating the Social Security and Medicare 

programs remains a remarkable one, in that the two programs have provided critical social insurance protections for hundreds of millions of 

Americans, at exceptionally low administrative cost, with financing methods that have been accepted historically as generally equitable. We 

believe that with responsible bipartisan action, Social Security and Medicare can continue to fulfill these vital roles—but we stress that such action 
must be prompt and sufficiently decisive if these programs are to serve 

future generations as well as they have served earlier ones.

Charles P. Blahous III,

Trustee

Robert D. Reischauer,

Trustee
.
.

2012