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NATIONAL CENTER FOR POLICY ANALYSIS
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| Government Spending on the Elderly: Social Security And Medicare |
Each year actuaries with the Social Security Administration (SSA) and the Health Care
Financing Administration (HCFA) report in detail on the status of Social Security and Medicare and make
projections for the next 75 years, based on a number of demographic and economic assumptions. The
actuaries make three sets of projections: an intermediate forecast, a low-cost (optimistic) forecast and a
high-cost (pessimistic) forecast. What follows is a brief summary based on the most recent reports. |
Social Security. As far as we care to look into the future, Social Security
spending will rise relative to our national income and will do so almost continuously under any set of
reasonable assumptions.
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"In addition to Social Security, the elderly also receive Medicare &
other medical benifits" |
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- Currently, spending on Social Security equals about 10.2 percent of the nation’s total taxable payroll.
- Under the SSA’s intermediate forecast, by the time today’s 18-year-olds reach retirement age in 2050,
spending will equal 16.8 percent of payroll - an increase of more than two-thirds. [See
Figure I.]
Social Security Plus Medicare Hospital Insurance. Social Security
is not the only elderly entitlement, however. Future workers will also have to pay for Medicare. Medicare
Part A, or Hospital Insurance (HI), primarily pays for hospital bills.
- Currently, spending on Social Security and Medicare Part A combined equals 12.7 percent of payroll.
- According to the SSA’s intermediate forecast, by 2050 spending on Social Security and Medicare
Part A will swell to 21.7 percent of payroll.
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"By mid-century, the federal government will need almost a third of
workers' incomes just to pay benefits for the elderly already included in current law." |
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Social Security Plus Total Medicare. Medicare Part B, or Supplementary Medical
Insurance (SMI), covers physicians’ fees and other outpatient expenses. It is funded by beneficiaries’
premium payments (about 25 percent) and a subsidy from the federal government’s general revenues (about
75 percent). The calculations included herein assume that beneficiary premiums will continue to cover 25
percent of Part B costs and that Part B expenses will grow at the same rate as Part A expenses. Further,
in order to facilitate comparison, we are expressing this burden as a percent of taxable payroll, along
with Medicare Part A.
- Currently, spending on Social Security and total Medicare combined equals 14.2 percent of payroll.
- According to the SSA’s intermediate forecast, by mid-century spending on Social Security and total
Medicare will increase to 28.2 percent of payroll - more than one-fourth of workers’ incomes.
Social Security Plus Total Health Care Expenses. Medicare is not the only
way government provides medical benefits to the elderly. To determine how high future expenditures on
elderly retirement and health care benefits will be, spending on other programs that provide benefits to
the elderly - like Medicaid (for the poor) and the Department of Veterans Affairs (VA) - must be included.
- An NCPA forecast assumes that the elderly will continue to pay out-of-pocket the same share of
health expenses they pay today and that taxpayers will pay the difference.
- Based on the Social Security Administration’s intermediate assumptions, we estimate that by 2050
the burden of all elderly entitlements will rise to 32.3 percent of payroll.
Thus by mid-century, the federal government will need almost a third of workers’
incomes just to pay benefits for the elderly already included in current law. Moreover, this burden comes
on top of all the other services taxpayers will be expected to fund - from national defense to roads and
bridges to salaries for teachers and police officers.
Pessimistic Forecast. Nor is this the worst that can happen, as
Figure II
demonstrates. The pessimistic projections developed by the Social Security and Medicare trustees paint an
even grimmer picture:
- When today’s 18-year-olds reach retirement age, Social Security spending will equal 21.7 percent
of payroll - more than twice the current burden.
- And when all elderly entitlement spending is included, the burden will equal 54.4 percent of
payroll.
If this projection proves true, we have already pledged more than half the incomes of
future workers just to cover benefits for the elderly already included under current law. This burden will
be even greater if Congress adds a Medicare prescription drug benefit (which is imminent) or a long-term
care benefit (which seems likely in a few years).
Social Security vs. Health Care. Although public discussion has been
recently focused on reforming Social Security, our analyses find that the bigger problem is health care.
Based on the intermediate projections of the Social Security Administration and the Health Care Financing
Administration, by the time today’s teen-agers are in their retirement years, government spending on
elderly health care will actually surpass spending on Social Security. [See
Figure III.] If the pessimistic projection proves to be true,
health care spending will surpass spending on Social Security during the baby boomer retirement years.
[See
Figure IV.]
Rethinking the
Assumptions about Health Care. In 1998 the NCPA made projections based on the Social Security and
Medicare trustees’ 1997 reports. The conclusion:
- Based on intermediate assumptions, the burden of elderly entitlements will exceed 40 percent of
taxable payroll by the middle of the 21st century.
- Based on pessimistic assumptions, the burden of elderly entitlements will exceed two-thirds of
taxable payroll.
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"By the time today's teens are in their retirement years, government
spending on elderly health care will surpass spending on Social Security" |
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As bad as the current projections are, they are much better than the projections three years ago. What happened to improve the outlook? The answer is that in a single year, the Medicare trustees abruptly changed assumptions, wiping out almost one-third of Medicare’s unfunded liability. As a result of these changes:
- Predicted spending on Medicare in 2030 was reduced by an amount equal to 87 percent of the
current program when scaled relative to the economy.
- For 2070 the trustees assumed away an amount of Medicare spending that exceeds the entire
current program when scaled relative to the economy.
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The Problem with Tax Collection. Social Security Administration and Health Care
Financing Administration forecasts used for Figures
I and
II and Appendix Tables
I and
II are “static” forecasts that implicitly assume higher tax
rates will generate increased government revenues with no change in economic behavior. For example, the
forecasts assume that taxable payroll in the future will be the same, whether the tax rate is 15 percent
or 55 percent. However, experience shows that in the face of higher tax rates, people work less and avoid
or evade taxes more, which reduces economic growth..
Escalating payroll taxes mean higher marginal tax rates for American workers. The Joint Economic Committee of Congress estimates that for each additional dollar the government increases its revenue, the private economy loses an additional 25 cents in lost goods and services.8 For example, if payroll tax rates were increased in an effort to raise revenue by $10 billion, taxpayers would actually be $12.5 billion worse off. Thus tax rates will have to be even higher than those presented here. |
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Copyright © 2001 National Center for Policy Analysis |
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