* Improved outlook could make Congress complacent
* Social Security budget outlook largely unchanged
* Disability insurance changes needed by 2016 -report
By David Lawder and Margaret Chadbourn
WASHINGTON, May 31 (Reuters) - Slower growth in U.S. healthcare costs improved the budget outlook for the Medicare program for the elderly from last year, but the fortunes of the Social Security pension program have not changed despite a better economy, trustees of the programs said on Friday.
The trustees repeated warnings to Congress to pass reforms that will enable the programs to meet all of their long-term obligations, but their report adds to recent evidence of an easing in U.S. budget pressures, and could help encourage a sense of complacency in Washington.
The main trust fund that supports the Medicare healthcare program will be depleted in 2026, two years later than forecast last year, the trustees said in their annual status report.
The trustees attributed the improvement to lower projected spending for most treatment categories, especially in skilled nursing homes, an assumption in keeping with recent signs of slower healthcare inflation.
They also said the implementation of key parts of President Barack Obama's healthcare reform law next year will reduce costs by more than previously projected.
The report said the Social Security fund for retirees will be depleted in 2033, the same as forecast last year. But a much more pressing need is the 2016 depletion date for the Social Security's trust fund that pays benefits to people with disabilities.
While this is also unchanged from last year's report, it means that Congress now only has three years to agree on new funding or reforms that would avoid reduced payments to beneficiaries.
Depletion of the Medicare and Social Security trust funds does not mean that all benefits would stop. At the current rate of payroll tax collections, Medicare would be able to pay about 87 percent of costs after 2026, declining to 71 percent by 2047. Social Security would be able to pay about three quarters of its benefits through 2087, according to the report.
REFORM ENTHUSIASM DIMS
The programs represent the two largest federal expenditures and account for about one-third of all U.S. fiscal outlays. The reports will feed into bitter arguments between Democrats and Republicans over how to reform the programs to keep them solvent and able to support the needs of the massive Baby Boom generation that is now starting to retire.
The healthcare improvements cited by the trustees in the report could dampen enthusiasm, particularly among Democrats, for any reforms to entitlement programs. The report comes on the heels of other signs showing a quick, if only temporary, reduction in the U.S. budget deficit.
"It reinforces a consensus in this city that the crisis isn't imminent," said Greg Valliere, chief political strategist at Potomac Research Croup, a firm that advises investors on Washington politics. "A mood of complacency is intensifying over entitlement reform. There's no sense of urgency."
U.S. Treasury Secretary Jack Lew said the report supports Democrats' approach of protecting the basic structure of Social Security and Medicare, while reducing healthcare costs and excessive drug subsidies and asking wealthier seniors to contribute more.
While the Obama administration wants to work on bipartisan reforms to strengthen the programs' financial footing, Lew said "changes to Social Security and that involve deep cuts in benefits or privatization will be unacceptable."
Senator Bernard Sanders, a liberal Independent from Vermont, said the report shows that Social Security "is not going broke" and argued against Obama's proposal to limit future cost-of-living increases by applying a less-generous measure of inflation.
Sanders in a statement said the report showed the wealthy should pay more into the pension program. "We must lift the cap on Social Security payroll taxes and make the wealthy contribute the same percentage of their income as other workers," he said. "Today, someone making $10 million a year contributes the same amount of money as someone making $113,700. That is absurd."
Republicans in the House of Representatives, meanwhile, have proposed massive long-term changes to Medicare that would effectively convert the popular fee-for-service program into a voucher-like system that provides a subsidy to seniors to buy private health insurance.
"Today's report is yet another reminder that Medicare and Social Security are in great danger," said a spokesman for House Budget Committee Chairman Paul Ryan of Wisconsin, the leading Republican fiscal voice. "We need to protect and strengthen these critical programs."
Republicans also want to repeal Obama's healthcare reforms. But the report said the "modest improvement" in the Medicare finance outlook came from lower projected spending for most service categories "that reflect recent data suggesting that certain provisions of the Affordable Care Act will reduce growth in these costs by more than previously projected."
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