Is War Between Generations Inevitable?
No. 246
Friday, November 30, 2001
by Jagadeesh Gokhale and Laurence J. Kotlikoff
Table of Contents
- Executive Summary
- The Perfect Fiscal Storm
- What Color Is the Ink?
- The CBO's Fiscal Fantasy
- A Spending Reality Check
- Social Security's Long-Term Funding Shortfall
- How Valid Are the Social Security Trustees' Future Projections?
- Medicare's Long-Term Funding Imbalance
- Are Medicare's Trustees To Be Trusted?
- Social Security's and Medicare's Long-Term Finances: A Summary
- Generational Accounting
- Taking a Closer Look at Generational Accounts
- Policies to Achieve Generational Equity
- Conclusion
- Notes
- References
- Appendix
- About the Authors
Are Medicare's Trustees To Be Trusted?
The Medicare trustees are much more optimistic than they were just three years ago. In their 1997 report, they projected that in 2030 Medicare spending would equal 7.14 percent of GDP. In 1999, they projected 2030 spending would total only 4.87 percent of GDP. The 2.27 percent of GDP discrepancy between these numbers is enormous when you consider that Medicare expenditures are currently about 2.6 percent of GDP. Hence, between 1997 and 1999, the Medicare trustees assumed away an amount of 2030 spending on Medicare that, when scaled relative to the economy, equals 87 percent of the current program. The optimism is greater the farther out one looks. For 2070, the trustees assumed away an amount of Medicare spending that exceeds the size of the current program when scaled by the size of the economy!
The fact that the Medicare trustees' projections are so different today than they were only three years ago means three things. First, the trustees are anchoring much of what they expect Medicare to spend in future years to very recent spending levels. Second, in applying the recent slower growth rate of Medicare spending to the distant future, they are ignoring the fact that Medicare growth has slowed in the past due to cost-containment policies and for other reasons, only to speed up thereafter. Third, there is no guarantee that the much higher future costs projected in 1997 won't be projected again in a few years. Indeed, recent double-digit rate hikes in HMO fees reported in the Northeast and other parts of the country suggest that Medicare costs may already be on the rise.
