By the time today's college students retire, the federal government will be spending as much on medical bills for the elderly as it will on Social Security, according to an "intermediate" forecast by Medicare trustees. Their "pessimistic" forecast has Medicare spending far more.

Under the pessimistic scenario -- which experts find more plausible -- Medicare alone will gobble up one in every five payroll dollars by 2045. Toss in other benefits, and more than half of future taxpayers' income will be needed just to pay benefits to the elderly.

What are the factors behind this advancing nightmare?

• Like Social Security, Medicare is a pay-as-you-go program -- every payroll-tax dollar that comes in is immediately spent.

• According to the trustees' "intermediate" forecast, total Medicare taxes -- combining Part A and Part B -- will be equal to 12.1 percent of a worker's earnings in 2045.

• Add in Social Security, Medicaid and other health programs for the elderly, and the total rises above 34 percent (see figure).

• Under the "pessimistic" forecast, costs for the same benefits shoot up to 55 percent.

To head off this calamity, John Goodman, president of the National Center for Policy Analysis, advocates moving rapidly to a fully funded retirement system in which each generation pays its own way. Using figures developed by Texas A&M economists Thomas R. Saving and Andrew J. Rettenmaier, he points out that today's young people could replace Medicare with private insurance if they put about $600 a year into private accounts. Their Medicare payroll tax could be reduced dollar-for-dollar.

Failing to act quickly to implement such a private plan leaves only the prospect of draconian and probably uncollectable taxes, or severe rationing of health care for the elderly.

Source: John C. Goodman (National Center for Policy Analysis), "Why Your Grandchildren May Pay a 55 Percent Payroll Tax," Wall Street Journal, October 7, 1998.