Cecily O'Connor
RedwoodAge.com
As Social Security drifts toward bankruptcy, Medicare is facing a much greater deficit that could snowball as baby boomers reach retirement, according the National Center for Policy Analysis.
Medicare - signed into law in 1965, a year after the last of the boomers was born - has an unfunded liability six times the size of Social Security. That's because, on a per capita basis, healthcare spending has been rising at rate two to three times faster than the gross domestic product (GDP) over the past half-century, according to the study's authors, Andrew J. Rettenmaier, executive associate director for Texas A & M's Private Enterprise Research Center, and Thomas R. Saving, director at the research center.
If the real growth of health care spending exceeds that of GDP by 2 percentage points, health care spending will consume almost 80 percent of GDP by 2075, warn Rettenmaier and Saving. That projected growth rate could result in a five-fold increase in health care’s share of the economy from present levels.
Medicare Trustees estimate the program's unfunded liability over the next 75 years at $32.4 trillion. Looking indefinitely into the future, the unfunded liability is $70.8 trillion, according to the study, which used the same assumptions as the trustees' report.
As baby boomer retirees begin to flood the Medicare system, costs will soar. There is concern, too, that boomers' Medicare needs could hurt other federal programs. Consider the following: Medicare currently claims roughly 11 percent of federal non-entitlement tax dollars. By 2020, Medicare will eat up one in every five federal tax dollars.
"This means that in just 13 years the federal government will have to stop doing one in every five things it does today if taxes are to remain at their current level and projected Medicare benefits are paid on behalf of the disabled and the elderly," according to the study.
Projections beyond 2020 paint even uglier picture. By 2030, Medicare will claim one in every three general revenue dollars. By 2050, it will claim one in every two.
Reform Needed
Several reforms have been suggested to dig Medicare out of debt, according
to the study. This includes raising taxes, having retired boomers pay for more
of their benefits, cutting benefits for higher-income beneficiaries and raising
the eligibility age. However, the reforms aren't fool-proof and would do little
more than "change the allocation of program costs" between taxpayers
and seniors.
The study also weighed other healthcare cost-cutting suggestions. For example, a common technique in other developed countries is to impose a global budget on health care providers. However, even spending constraints wouldn't entirely wipe out Medicare's unfunded liability. That's because 48 percent of the projected growth in Medicare is due to population growth and aging, while 52 percent is due to per capita spending growth in excess of per capita GDP growth.
Health Savings Accounts that come with a $5,000 deductible policy might be more effective than government controls since HSAs encourage consumers to make their own choices between healthcare and other spending. HSA reform could reduce Medicare’s unfunded liability by as much as 40 percent if programs were started immediately.
Another option: upon reaching age 65, Medicare beneficiaries would enroll in a health plan that is indexed only for inflation, rather than increases in health care costs. Although this option would deny many seniors access to new technology, it would reduce Medicare's unfunded liability up to 40 percent.
"Rationing of some kind, through spending limits or greater cost sharing, will be necessary," said Saving. "But even with an aggressive program, it will not be enough because the numbers of beneficiaries and health care costs are growing so fast. Ultimately, we must move to a system in which each generation pays some or all of its own way by saving for its own retirement healthcare needs."
