UPDATE 2-U.S. trustees warn about rising Medicare costs

U.S. administration officials on Monday issued a dire warning about the rising costs of Medicare and Social Security, saying the two popular programs for elderly are rapidly driving up government spending and are in urgent need of change.

"Without change, rising costs will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America's future prosperity," Treasury Secretary Henry Paulson said as he released the annual trustees reports on the finances of the health and retirement programs.

The reports said the Medicare Hospital Insurance trust fund will exhaust its assets in 2019 instead of the 2018 date forecast last year. The change was due to bigger payroll tax collections, the report said. The Social Security trust fund also extended its exhaustion date by a year to 2041, but that was due primarily to a technical change in the calculations.

The Medicare report raised a "funding warning" that is meant to trigger congressional debate over trimming government spending on the health care program, which faces huge strains from rapidly rising costs and the aging baby boom generation.

U.S. Labor Secretary Elaine Chao, one of the trustees, said the warning will force lawmakers next year to debate reform of the health care program for the elderly.

"Under the law, the administration must propose and Congress must consider reform legislation next year," Chao said at a news conference.

It is unclear whether Congress will consider administration proposals to cut Medicare spending in a presidential election year when Democrats hope to capture the White House while solidifying their control over Congress.

Administration efforts to overhaul Social Security to create individual investment accounts failed and Paulson expressed frustration with a lack of progress even though both Democrats and Republicans believe reform is needed.

"There was a time when I was more optimistic than I am today. ... I'm getting a little bit tired of playing solitaire," Paulson said.

House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, said lawmakers would do what was necessary to restore the financial health of the programs but the main question is whether Republicans and Democrats will be able to overcome deep divisions to produce a bipartisan plan.

"This report underscores the importance of rebuilding trust between the parties, so that we may work together to protect the guaranteed benefits provided by Social Security and Medicare," Rangel said.

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

President George W. Bush hailed the results of the new Medicare prescription drug program, which relies mostly on private insurers to deliver the benefit to seniors. The cost of the new program were significantly lower than first estimated and Bush said that should serve as an example during the reform debate that "competition works, competition can lower price, and improve the quality" for beneficiaries.

But the report said the long range outlook is less rosy.

"In the long range, the outlay projections return to, and eventually exceed, the prior projected level," the report said.