Saving Medicare
Introduction
In their 1997 report, the Medicare trustees predicted that the Hospital Insurance Trust Fund (Medicare Part A) would be depleted by the year 2001. Since then Congress has taken a few steps to shore up the fund and postpone its depletion until 2008 - just 10 years away. However, Medicare's long-term prognosis remains bleak.1
"Medicare has an unfunded liability of $8.9 trillion."
Although the trust fund's imminent bankruptcy is getting all of the attention, the real story is the magnitude of the unfunded commitments we have made to future generations of retirees. The trust fund's bankruptcy is merely a symptom of Medicare's real financial problems. Under the current system, the growth in the tax base will not and cannot keep up with the projected growth in promised benefits. Using the Medicare trustees' most recent estimates, the total unfunded liability (the present value of expected benefits minus expected tax revenues) is $8.9 trillion. This huge unfunded liability has several causes. Primary among them is the rapid growth of the elderly population relative to the population of working taxpayers. This, of course, is the same problem faced by Social Security. But Medicare's problems are made worse by two additional factors: rapidly expanding medical technology and increased health care utilization.
With a liability of this magnitude, Americans face tough choices. Most of the proposals for solving the problem are aimed at stemming the growth in benefits while keeping the structure of the current system intact. These include increasing HMO enrollment, raising the retirement age and expanding retirees' choices of insurance plans. While these steps can go some of the way towards addressing Medicare's short-term financial crisis, they offer no permanent solution.
Real reform means replacing a pay-as-you-go system under which the elderly depend on younger taxpayers to pay their benefits with a system under which each generation pays its own way. This reform would allow people to set aside money in personal accounts during their working years from which to purchase health insurance and pay medical bills during the years of their retirement.