Trustees Project Further Slowing in Health Care Cost Growth, CEPR Economist Says

WASHINGTON, April 23 -- The Center for Economic and Policy Research issued the following statement by Senior Economist Dean Baker in response to the Social Security and Medicare trustees' reports:

"There were few major changes in the Social Security and Medicare projections in the 2019 trustees' reports for the two programs. However, the reports did show a continuation of the trend toward lower health care cost growth. The slowing of health care cost growth, coupled with tax increases in the Affordable Care Act (ACA) has led to a large improvement in the combined finances of the two programs. The projected shortfall in Medicare fell from 1.74 percent of payroll for the years 2009-2083 in the 2009 trustees' report to 1.14 percent of payroll for the years 2019 to 2093 in the most recent report.

"The actual drop due to improved projections is somewhat larger than these projections indicate since the projection period has moved out 10 years. While the program was projected to have modest annual deficits in the years 2009-2018 of less than 0.5 percent of payroll, it was projected to have annual deficits of more than 3.5 percent of payroll in the 2080s.

"The improvement in projections is seen most clearly in the projected rate of increase in per capita Medicare costs. The 2009 report assumed a 5.1 annual rate of increase in costs per beneficiary before accounting for changes in demographics. The 2019 report assumes a 3.8 percent rate of increase in costs per beneficiary, only slightly faster than the projected rate of growth in nominal GDP.

"The assumption of a continued slowdown in the rate of health care cost growth also shows up in the Social Security trustees' report. The 2019 report assumes that over the long-term, the ratio of wages to total compensation falls at the rate of 0.05 percent annually; this compares to a rate of 0.06 percent annually in the 2018 report. Payments for employer-provided health care insurance are the largest factor in the difference in the rate of growth of compensation and the rate of growth of wages. Over the last five years, this difference has decreased as wages have grown as a share of total compensation.

"In the 2009 report, before the passage of the ACA, the wage share of compensation was projected to fall at the rate of 0.2 percent annually, the same rate as the economy had seen over the prior five decades. The difference between the projected rate of fall in the wage share of compensation in the 2009 trustees' report and the 2019 trustees' report is equivalent to a 0.15 percentage point reduction in the annual Social Security tax.

"To put this slightly differently, if the wage share of compensation were to decline over the next decade by the amount that had been projected in the 2009 trustees' report, instead of the 0.05 percentage point decline now projected, it would have the same impact on workers' living standards as a 1.5 percentage point increase in the Social Security payroll tax.

"This is worth noting in the context of the current debate on Social Security, since some critics of the Larson bill, which phases in tax increases at the rate of 0.1 percent annually, have complained that it would hurt the living standards of younger workers. While this tax increase will have a modest impact on the after-tax wages of workers, the reduction in health care cost growth following the passage of ACA has had a larger impact on raising wages.

"If the negative impacts on wages implied by the tax increases in the Larsen bill are a big deal, then it follows that the gains in wages from slower health care cost growth over the last decade must be an even bigger deal. They deserve more attention than they have received."