Government Spending on the Elderly: The Other War

by Matt Moore

There was a time - before September 11 - that Social Security was the most cantankerous public policy debate in Washington, D.C. The future of the program was so hotly contested because it is widely recognized that the program is in trouble and needs reform.

But for all the attention paid to Social Security, it is not the elderly entitlement program in most trouble; health care is. Government health care spending for the elderly will actually surpass spending on Social Security by 2060.

Social Security's costs alone will increase by more than 37 percent by the time today's college students reach retirement age. The Social Security portion of the payroll tax - currently at 12.4 percent - will have to increase to more than 18 percent to meet the program's expenses.

Why the increase? Social Security is an income transfer program. This means the wages of today's workers are taxed to provide benefits to today's retirees. Likewise, when today's workers retire, they will depend on future workers to pay their benefits. We call this system pay-as-you-go, because Social Security's expenses are paid as they come due. Nothing is invested and nothing is saved.

Pay-as-you-go wasn't a problem when there were 42 workers paying in for each retiree collecting benefits. But times have changed. Today people are living longer and are having fewer children, which means that increasingly there are more retirees and relatively fewer workers to fund their benefits.

Social Security is in bad enough shape. But Medicare and other elderly health expenditures (through Medicaid, Veterans Affairs and others) are far worse. Not only do these health programs have to deal with the same demographic problems - because, like Social Security they are partially pay-as-you-go - but they also have to cope with the rapidly rising costs of medical care. We could not have imagined the medical improvements and changes that have taken place since Medicare was implemented in 1965. And we cannot begin to fathom the advancements that will be made over the next 50 years. What we do know is that these innovations will be expensive.

Continuing to provide seniors with access to the latest treatments and medicines is an expensive proposition. This has become evident over the past several decades; in all but a handful of years, the increase in the cost of medical care has outpaced inflation. And we can expect that trend to continue into the future - with significant consequences for the government's ability to fund the health care programs for the elderly.

  • Between now and 2030 - when the last of the baby boomers reach retirement age - Social Security's cost will increase 33 percent. Over the same period, Medicare's costs will increase by 76 percent.
  • Between now and 2050 - today's college aged workers begin to retire - Social Security's costs will increase 37 percent, while Medicare's costs will increase by 287 percent.
  • Between now and 2070 - when today's newborns begin to retire - Social Security's costs will increase 46 percent, while Medicare's costs will increase by a whopping 468 percent!

Throw in the other programs that provide elderly health care benefits like Medicaid and Veterans Affairs and the numbers explode. By mid-century, taxpayers will be shouldered with a tax rate of almost a third of their incomes to fund these elderly entitlements. And that's just if we pay for what's promised under current law. Other proposals like prescription drugs and long-term care will make the programs even more expensive.

The pay-as-you-go model of the mid 1900's isn't set up to meet the needs of the changing demographics of the 21st Century. Medicare and Social Security are both expected to run short of money by 2016, when the money flowing into both programs from the payroll tax will no longer be enough to finance the operations of each program. At that time the programs will go begging for more cash. If we don't reform, we'll have to collect more money (raise taxes through the roof) or reduce the costs (slash benefits for retirees).

While the war on terrorism has understandably consumed the nation's attention, the threat to our long-term economic security that these elderly entitlement programs pose remains. We must act now to transition both Social Security and Medicare away from pay-as-you-go financing, to systems where each generation pays its own way.

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