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Projection for Social Security gets weaker; Barring change, program faces insolvency in 2033

Social Security is rushing even faster toward insolvency, driven by retiring baby boomers, a weak economy and politicians' reluctance to take painful action to fix the huge retirement and disability program.

The trust funds that support Social Security will run dry in 2033 -- three years earlier than previously projected, the government said Monday.

There was no change in the year that Medicare's hospital insurance fund is projected to run out of money. It's still 2024.

However, the program's trustees said the pace of Medicare spending continues to accelerate. Congress enacted a 2 percent cut for Medicare last year, and that is the main reason the date for the trust fund exhaustion did not advance.

The trustees who oversee both programs say high energy prices are suppressing workers' wages, a trend they see continuing. They also expect people to work fewer hours than previously projected, even after the economy recovers. Both trends would lead to lower payroll tax receipts, which support both programs.

Unless Congress acts -- and forcefully -- payments to millions of Americans could be cut.

If the Social Security and Medicare funds ever become exhausted, the nation's two biggest benefit programs would collect only enough money in payroll taxes to pay partial benefits. Social Security could cover about 75 percent of benefits, the trustees said in their annual report. Medicare's giant hospital fund could pay 87 percent of costs.

"Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare," the trustees wrote. "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."

The trustees project that Social Security benefits will increase next year, though the increase could be small. They project a cost-of-living-adjustment, or COLA, of 1.8 percent for 2013; the actual amount won't be known until October.

Beneficiaries got a 3.6 percent increase this year, the first after two years without one.

More than 56 million retirees, disabled workers, spouses and children receive Social Security. The average retirement benefit is $1,232 a month; the average monthly benefit for disabled workers is $1,111.

About 50 million people are covered by Medicare, the medical insurance program for older Americans.

America's aging population -- increased by millions of retiring baby boomers -- is straining both Social Security and Medicare. Potential options to reduce Social Security costs include raising the full retirement age, which already is being gradually increased to 67, reducing annual benefit increases and limiting benefits for wealthier Americans.

Policymakers could also increase the amount of wages that are subject to Social Security taxes. Social Security is financed by a 6.2 percent tax on the first $110,100 in workers' wages. It is paid by both employers and workers. Congress temporarily reduced the tax on workers to 4.2 percent for 2011 and 2012, though the program's finances are being covered by more government borrowing.

The Medicare tax rate is 1.45 percent on all wages, paid by both employees and workers.

Many advocates for senior citizens worry that Washington is too focused on benefit cuts as a way to shore up Social Security. They argue that the program's finances are not as dire as some policymakers contend.

"After 77 years and 13 recessions, Social Security continues to prove itself time and again as the most effective public program in our nation's history, keeping its promise to our seniors, disabled workers, widows and children," said California Rep. Xavier Becerra, ranking Democrat on the House Social Security Subcommittee.

President Obama's health care law is supposed to trim Medicare expenses by $500 billion, extending the life of the program. But some independent experts doubt that the full savings will materialize, and even the Obama administration acknowledges that more cuts are needed. If Republicans succeed in repealing the law, they will have to come up with similar cuts of their own.

The trustees acknowledged that their own Medicare projections could be too rosy. Based on current law, they assume that cuts in payments to doctors that Congress routinely waives will actually take place. They also assume that the health care law will squeeze the full amount of its cuts from the program. "Medicare's actual future costs are highly uncertain and are likely to exceed those shown in this report," the trustees said.

Republicans, including presumptive presidential nominee Mitt Romney, are proposing to overhaul Medicare by converting it into a system that mainly relies on private health insurance plans to cover future retirees. Beneficiaries would get a fixed payment from the government, with low-income senior citizens in poor health receiving more.

Obama says he wants to preserve the existing program and its guaranteed benefits.