NCPA - Policy Report 256 - Medicare Reform and Prescription Drugs: Ten Principles

NATIONAL CENTER FOR POLICY ANALYSIS
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Medicare Reform and Prescription Drugs: Ten Principles

Principle No. 5: Adding a Drug Benefit to Medicare as Currently Structured Would Create an Unbearable Burden for Future Generations.

Medicare currently pays only about 5 percent of the cost of prescription drugs Medicare beneficiaries use. Proposals to add a comprehensive prescription drug benefit to the program could shift as much as two-thirds of senior drug costs to Medicare.19 This would increase the already substantial burden Medicare expenditures will place on future taxpayers.

Medicare's Unfunded Long-term Liability. Medicare is a pay-as-you-go program, under which the federal government collects payroll taxes and promptly spends the money on benefits. The government does not set aside or invest funds to pay future benefits. Anyone who has worked at least 10 years has already earned the right to receive future Medicare benefits, and a previous NCPA study by economists at the Private Enterprise Research Center at Texas A&M University estimated the current accrued liability under Medicare at almost $17 trillion.20 This is more than five times the official national debt.

Of course, future payroll tax revenues will help meet these obligations. But Medicare already spends more on benefits than it receives in payroll taxes from workers, premiums from the elderly and taxes on Social Security benefits. In the future, the financial picture will get much worse.21

Medicare's Future Deficits. Currently, the government provides additional funds for Medicare from general revenues - mainly personal and corporate income taxes. Figure I shows how much of federal income taxes will be needed to fund future Medicare deficits with no change in the current payroll tax rate. Even without the addition of drug benefits, the long-term outlook for Medicare is bleak:

By 2030, about the midpoint of the baby boomer retirement years, the annual Medicare deficit will consume 20 percent of income tax revenues.

By 2050, when today's teenagers are reaching retirement age, Medicare's annual deficit will consume about one-third of income taxes.

Transfers to Medicare from general revenues are only part of the picture. After 2017, Social Security also will require general revenue transfers to supplement an inadequate payroll tax:

In 2030, Social Security will require about 14 percent of federal income tax revenues, and Medicare and Social Security combined will consume more than 34 percent on top of the 15.3 percent payroll tax.

By 2050, Medicare and Social Security will require more than 48 percent of all federal income tax revenues in addition to all dedicated taxes and premiums.

Bleak as this financial picture is, adopting any of the prescription drug proposals currently before Congress would make it far worse.

The House Democratic Proposal.To extend Medicare's coverage to prescription drugs, Democrats in the House of Representatives have proposed a plan that includes a $100 deductible, a $25 monthly premium, 80 percent coverage between $101 and $2,000, and 100 percent coverage beyond $2,000 in expenditures. Under this plan, the federal government's subsidy would be quite large, and it would grow through time:

Assuming all seniors participate, Medicare likely would pay about two-thirds of their drug costs.

A rough estimate is that this proposal would raise Medicare's deficit to 35 percent of income taxes by 2030 and 53 percent by 2050.

When the Social Security deficit is included, more than two-thirds of income tax revenues would be needed just to pay seniors' benefits by mid-century, when today's teenagers are reaching retirement age. [See Figure II.]

The House Republican Proposal.Republicans in the House of Representatives have proposed a prescription drugs benefit package that includes a $34 monthly premium, a $250 deductible, 80 percent coverage of prescription drug costs between $251 and $1,000, 50 percent coverage between $1,001 and $2,000, no coverage between $2,001 and $4,800, and 100 percent coverage above $4,800. No senior would pay more than $3,700 out of pocket per year.22 As with the Democratic plan, the Republican plan would require large and growing subsidies - mainly paid by younger taxpayers:

Assuming all seniors participated, Medicare likely would pay for a little more than one-fourth of their drug costs.

A rough estimate is that the GOP drug benefit would raise Medicare's claim on other revenue to 25 percent of income taxes by 2030 and 40 percent by 2050.

When the Social Security deficit is included, 55 percent of income tax revenues would be needed just to pay seniors' benefits by mid-century, when today's teenagers are reaching retirement age. [See Figure II.]

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