US Medicare fund 12 years from running out: trustees (Reuters)

WASHINGTON (Reuters) - The U.S. Medicare trust fund will be exhausted in a dozen years, two earlier than forecast last year, because of increasing health care costs, the funds' trustees said on Monday.

"The message of this report is urgency," Health and Human Services Secretary Michael Leavitt told reporters, echoing two other Cabinet secretaries' call on Congress to reform Medicare and Social Security. "It is time to act."

Medicare is the government's health insurance plan for the elderly and Social Security is the main retirement program.

Both are funded through U.S. employees' payroll taxes -- but are projected to come under financial pressure as the U.S. population ages and outlays outpace revenues.

President Bush in 2005 proposed overhauling Social Security to allow workers to divert part of their payroll taxes into private investment funds in order to offset scaled-back benefits. But the idea has met with Democratic opposition and lukewarm public support.

Treasury Secretary John Snow said selecting a bipartisan commission to work on the fiscal sustainability of the social programs was taking time -- three months so far -- because the administration wants to "get this right."

He later told Bloomberg television that he expects the panel to be named later this year.

"There's no escaping that serious reform to both Medicare and Social Security need to be made," Snow said at a briefing.

White House spokesman Ken Lisaius said Bush would enlist Democratic views in his second attempt to overhaul Social Security and Medicare, which he views as the government's biggest fiscal problem.

"Plans are still under way to craft the commission in a serious bipartisan fashion," he said, adding that conversations were continuing with members of Congress.

The annual report of fund trustees, who include three Cabinet secretaries, showed the Social Security trust fund will exhaust its assets in 2040 instead of 2041, as forecast last year.

The Medicare trust fund is due to be drawn down in 2018, rather than 2020, as was forecast in 2005.

Democratic lawmakers said the report underscored that there is ample time to overhaul the program without resorting to private-sector fixes.

"Today's report confirms that, despite White House scare tactics, Social Security remains sound for decades to come. The real threat to Social Security comes from Republicans, most of whom support and voted for privatizing Social Security," Senate Democratic Leader Harry Reid said in a statement.

A leading retirees' advocacy organization, the AARP, said that even when the Social Security trust fund is exhausted in 2040, payroll taxes will be sufficient to fund benefits at 70 percent of current levels.

The organization disputed claims of an imminent collapse of the retirement system and criticized the concept of private accounts.

"Social Security can pay full benefits well into the boomers' retirement years," AARP Policy Director John Rother said in a statement. "Boomers" refers to people born during the U.S. baby boom that followed the Second World War.

The trustees projected Social Security outlays to outstrip tax income in 2017, the same date as forecast last year.

In addition, the portion of Medicare that pays for a new prescription drug benefit will require substantial increases in both revenues and premium charges to beneficiaries, the trustees said.

Enrollment in the drug benefit plan by the end of April was about 30 million and could reach 38 million by the May 15 deadline, Health and Human Services Secretary Leavitt said, pointing out that that would cover the vast majority of those people eligible for the entitlement.

Leavitt said Medicare funding needs would equal about 8 percent of U.S. gross domestic product in 35 years, up from about 3 percent now, and rise to 14 percent in 65 years.

Social Security poses a more manageable problem than Medicare, the two trustees who are not currently members of President George W. Bush's cabinet said.

"The fiscal problems of both programs are driven by inexorable demographics and, in the case of Medicare, inexorable health care cost inflation, and are not likely to be ameliorated by economic growth or mere tinkering with program financing," the two public trustees, John Palmer and Thomas Saving, said in the annual report.