Medicare Financial Woes
by Michael Thompson

Tough choices await those who want to guarantee that current and future generations of seniors have access to quality health care.

In his February 17, 2005 testimony before the Senate Budget Comittee Medicare Trustee Thomas R. Saving described the size of Medicare's huge unfunded obligations:

"Assuming that federal income tax revenues remain at the 50 year average of 10.89 percent of the nation's gross domestic product, the present value of all future federal income tax revenues from now to eternity is $99.3 trillion so that the Medicare debt of $61.6 trillion is 62 percent of all future federal income tax receipts.

Thus, if Congress passed legislation today, binding on all future Congresses, setting aside 62 percent of all federal income tax revenues from now to eternity, you could just pay for promised Medicare benefits. Bear in mind that this setting aside of 62 percent of federal income tax revenues cannot be in the form of treasury bonds sent over to CMS but must be in the form of real investment in the economy. That means that the funds must come from some combination of increased federal income taxes, reduced federal expenditures and increased federal borrowing."

Saving said demographic changes aren't the only reason for Medicare spending growth. Rising health care costs also play a significant role: Per-capita health care spending has grown three percent faster than per-capita GDP.

So, what can be done?

Congress and the American people lost significant ground by ignoring Medicare's unfunded obligations in 2003. With so much at stake, Washington politicians shouldn't be allowed to kick this problem to future generations. Procrastination only makes the solution more severe. We're squandering finite time and resources that could be used to minimize the damage. Doing nothing leaves the worst alternatives to future generations.

This problem won't solve itself.  As Saving noted: "The transfers required to pay current law benefits given current law taxes and premiums will grow from their current level to almost 19 percent of Federal income taxes in 2015, to over 32 percent in 2025, and will require over 90 percent of projected federal income tax revenues by 2075. Clearly it is hard to imagine transfers of this magnitude being made."

Can we tax our way out of the problems facing Medicare (not to mention other unfunded entitlements) without causing economic harm to Americans of all income levels?  The answer is no, according to researchers Tracy L. Foertsch and Joseph R. Antos. In an October 11 report, these health policy experts found: "Raising payroll and personal income taxes to cover Medicare's unfunded liabilities through just 2015 would, on average, reduce GDP by $105.5 billion per year and private-sector employment by over 921,000 jobs per year between 2006 and 2010. By 2015, real GDP would be more than $116 billion lower than without the tax increases. Raising payroll taxes to cover Medicare's shortfalls through 2079 would cause even more economic damage. Between 2006 and 2010, higher taxes would reduce GDP by over $204 billion per year and cost more than 1.7 million private-sector jobs annually, boosting the unemployment rate by almost a percentage point. By 2015, real GDP would be nearly $208 billion lower than without the tax increases."

What are the alternatives? No reasonable person wants a government bureaucrats to impose cost-based or age-based rationing on his family member when that care is medically appropriate and necessary.  How can we restrain Medicare spending without rationing seniors' access to life-saving health care?

Lawmakers who envision Medicare savings through more competition and choice, or improving disease management, preventative benefits, or health information technology still have a long way to go before significant savings materialize. Will lawmakers want to limit pork so this money can be used for Medicare? Can we find a way to reduce funding for other federal programs without causing hardships for individuals?

It is time to spark a national discussion on the most reasonable trade offs. This problem is certainly less glamorous than reality television, celebrity gossip columns, and political horse races, but we are unworthy of this great republic if we resign our grandchildren to crippling tax hikes and bureaucratic rationing.

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