US Treasury to President Obama: Medicare's current policy 'is unsustainable'

With a federal budget debate taking center stage on Capitol Hill, Washington's rhetoric is once again crowding out reality. Federal analysts show dire, economic consequences of not reining in spending in order to close our ever-growing deficit. Yet, you wouldn't know that from listening to the talking points out of D.C. press conferences.

In his inaugural address, President Obama suggested that his opponents aimed to eradicate Medicare for future generations under the guise of controlling spending and boosting U.S. growth. White House spokesman Jay Carney then took it a step further-suggesting spending naysayers had it wrong altogether and, in fact, entitlement programs such as Medicare and Medicaid were boons rather than burdens to the economy.[1]

This partisan posturing distracts from the actual question at the core of this debate: whether we can make the same Medicare promise to future generations that we've made to current seniors.

We cannot.

Current policy consists of guaranteeing seniors on Medicare a package of defined benefits, regardless of their cost. We cannot afford to make the identical promise to future generations. In the words of the most recent Financial Report of the U.S. Government just released by the Department of Treasury, "current policy is unsustainable."

But you don't have to believe me or Treasury. Take a gander at these figures and use your own common sense. First, Medicare costs are going through the roof both because the number of beneficiaries will more than double by 2080, but more importantly because the cost per beneficiary will more than quintuple![2]

The accompanying chart demonstrates that the cost of Medicare in 2080 will be more than 10 times as big as it was in 2011 in current dollars (i.e., today's purchasing power). Only about one fifth of this increase is the result of growing numbers of Medicare enrollees. The lion's share of the increase relates to explosive growth in Medicare costs per enrollee.

These figures are based on the Medicare actuary's alternative fiscal scenario, i.e., current policy. As I've explained repeatedly in earlier posts, this is a more realistic depiction of how things will play than "current law" estimates. After all, under current law, for example, Medicare would be required to slash physician fees by more than 30 percent next January. History suggests that isn't desirable and won't actually happen.

But from the standpoint of sustainability, ten-fold growth in Medicare would be easily manageable if we expected a ten-fold growth in aggregate inflation-adjusted worker earnings during the same period. Unfortunately, that is not at all what is expected by the government experts paid to noodle about such matters. Quite the contrary. The number of workers per Medicare beneficiary already has plummeted from 4.1 in 1970 to 3.2 in 2011 and is expected to nose-dive even further to 2.1 by 2080.

Remember that in the real world, there is no trust fund vault where Uncle Sam has safely squirreled away your lifetime payroll taxes to finance your Medicare benefits when you need them. The burden of paying for today's Medicare beneficiaries is paid by today's workers, through a combination of payroll taxes and general revenues.

In fact, few Americans realize that we spend more out of general tax revenues to bankroll Medicare than we do out of payroll taxes. Only one-eighth of Medicare spending in 2011 (the last year for which data have been reported) was covered by Part A, B or D premiums paid by beneficiaries.[3] Thus a crude measure of sustainability is the total amount of Medicare spending per covered worker. This measure somewhat overstates the actual burden faced per worker (since it includes the 12 percent of spending covered by beneficiary premium payments). But trends in its size are quite informative.

So, while Medicare's aggregate cost will rise more than 10-fold by 2080, the burden per covered worker will rise "only" 8-fold given the increase in the total number working between now and then.  Even under the best possible scenario-that Obamacare works exactly as advertised-this burden will be 5.6 times greater in 2080 than in 2011.

These figures demonstrate the deceptiveness of the false dichotomy (i.e., choosing between continuing benefits for current seniors and providing any benefits for future generations) D.C. politicos are spinning right now[4]. (As noted political economist Nicholas Eberstadt has trenchantly observed, "the president is not invested with authority to make facts disappear.")[5]

Generations to come cannot possibly have the same social contract as their parents or grandparents did. Unless they are to face soul-crushing tax burdens, they cannot possibly be promised the same open-ended entitlement to Medicare benefits that we accord to today's seniors, including those such as Warren Buffett who easily could afford to finance their own health expenses in retirement. Something will have to give, whether that takes the form of raising the retirement age, means-testing benefits or moving away from guaranteeing defined benefits and instead guaranteeing a defined contribution-perhaps all three and more.

The sooner the president recognizes that Obamacare threatens to be a miserable failure when it comes to corralling Medicare spending, the sooner we can get on with the business of fundamentally overhauling Medicare so that it actually looks like a 21st century health plan and is sustainable for generations to come. Every year we kick the can down the road simply increases the magnitude of the unconscionable burden this president already has loaded onto the shoulders of our children and grandchildren. Enough is enough.

 

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Christopher J.
Conover

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