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NATIONAL CENTER FOR POLICY ANALYSIS
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| Reforming Medicare |
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The federal government, through Medicare and Social Security, has committed to pay future benefits to retirees and workers. Currently, these implied obligations are not reported as federal government debts. But firms that offer pensions to their employees must report accrued pension debts. And like private pensions, Social Security and Medicare have well-defined eligibility requirements and, in the case of Social Security, a benefit formula. Thus, it is possible to calculate the accrued obligations of our elderly entitlement programs at a point in time.
Current Social Security and Medicare Implied Debt. Our elderly entitlement commitments arise as benefits accrue to workers who participate by paying taxes. Retirees receive Social Security benefits in the form of survivors, disability and retirement benefits, the bulk being retirement benefits. One's Social Security pension is based on the 35 highest annual earnings years, with earnings indexed for wage growth. Older workers who have completed 35 years of work are entitled to full Social Security benefits. Younger workers have lower accrued benefits, because they typically have lower earnings and fewer years in the labor force. Accrued benefits are those to which people are entitled today, assuming that we ended the two programs and paid off all liabilities. They can be calculated for any worker, regardless of age, as long as that worker is eligible. Medicare benefits accrue to all workers and their spouses after 10 years of paying Medicare payroll taxes.
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"A Medicare drug benefit would create obligations equal to 82 percent of the privately held national debt." |
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Figure V shows the accrued Social Security and Medicare obligations alongside the debt held by the public, using the measure described above. As the figure shows:
- In 2001, the debt held by private investors stood at $2.8 trillion.
- The present value of accrued Social Security obligations that year amounted to $12.9 trillion.
- The present value, in 2001, of Medicare's accrued liabilities was $10.3 trillion for Medicare HI benefits plus $6.6 trillion for SMI.
- Thus, the unofficial debt of the two entitlement programs was more than 10 times the size of privately held federal debt.
The Effects of a Prescription Drug Benefit. The purpose of calculating accrued debt is to make Congress and the public aware of the cost of creating a new entitlement. For example, adding the prescription drug benefit to Medicare without other reforms increases Medicare's total accrued obligations by 13.5 percent. Using our estimates of Medicare's future annual spending on prescription drugs and allocating costs to current beneficiaries, we estimate that the House's Medicare prescription drug benefit would increase Medicare's accrued liability by $2.3 trillion - equivalent to issuing bonds equal to 82 percent of the current privately held national debt.
House Democrats last summer pushed for a drug benefit that was more than twice as large as that the Republicans passed. Had the Democrats succeeded, additional accrued federal obligations would have more than doubled.
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