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Saving Medicare
January 1999
Appendix
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Because the Hospital Insurance (HI) portion of Medicare is funded by a payroll tax, the difference between the expected HI expenses and expected HI tax revenues is the basis for the present value calculations. The yearly estimates come from the Table III.B4, "Estimated OASDI and HI Income Excluding Interest, Outgo, and Balance in Current Dollars by Alternative, Calendar Years 19972075, Intermediate Estimates," in the 1998 OASDI Trustees Report. The values are in nominal dollars and are brought to the present using the nominal discount rate assumptions reported in Table II.D1, "Selected Economic Assumptions by Alternative, Calendar Years 1960-2075" in the 1998 OASDI Trustees Report.
Based on the 1998 Trustees Reports:
Supplementary Medical Insurance
Supplementary Medical Insurance (SMI) is financed by beneficiaries' premiums, set permanently at 25 percent of the program's expenditures by the Balanced Budget Act of 1997, and by general revenues. As the trustees put it, "The SMI premium and the corresponding income from general revenues are established annually at a level sufficient to cover the following year's expenditures. Thus, the SMI program is automatically in financial balance under present law, in contrast to OASDI and HI, where the financing established years earlier may prove significantly higher or lower than subsequent actual costs" (1998 Annual Report of the Board of Trustees of the Federal Supplementary Medical Insurance Trust Fund, p. 9). With this sort of financing the SMI program will technically never have an unfunded liability.
However, if we fix two things at the beginning, the premium as a percent of total expenditures and the funding following the same path as HI's funding, then we can estimate the unfunded liability in a manner similar to the way we calculated the HI unfunded liability. We fix the premium in all future periods at 25 percent of projected expenditures. The projected expenditures out to 2007 are from Table I.E1 (p.10) in the 1998 SMI Trustees Report. For the years beyond 2007, we use the projected SMI disbursements as a percent of GDP that are reported in Table III.A1 (p.65) in the 1998 SMI Trustees Report and multiply by projected GDP, which is reported in Table III. C1 in the 1998 OASDI Trustees Report. In addition to the premium, which is set at 25 percent of expenditures, we project implied tax revenues in the following way. In 1998 implied tax revenues are set equal to SMI expenditures less the 25 percent premium payment. Thus expenditures less revenues in 1998 are equal to zero in 1998. For all future years, the implied tax revenues grow at the exact rate at which HI tax revenues are expected to grow. Like the HI calculations, the difference between the two revenue and expenditures series is brought to the present using a nominal discount rate assumption reported in Table II.D1 in the 1998 OASDI Trustees Report.
About the Authors
Dr. Thomas R. Saving
is the Director of the Private Enterprise Research Center at Texas A&M University. A University Distinguished Professor of Economics at Texas A&M, he also holds the Jeff Montgomery Professorship in Economics. Dr. Saving's research has covered the areas of antitrust and monetary economics, health economics, the theory of the banking firm and the general theory of the firm and markets. He has served as a referee or as a member of the editorial board of the major U.S. economics journals and is currently an editor of Economic Inquiry. Dr. Saving has authored many articles and two influential books on monetary theory. He has been President of the Western Economics Association and President of the Southern Economics Association. After receiving his Ph.D. in Economics in 1960 from the University of Chicago, Dr. Saving served on the faculty of the University of Washington and Michigan State University. He moved to Texas A&M in 1968. Dr. Saving served as chairman of the Department of Economics at Texas A&M from 1985-1991.Andrew J. Rettenmaier is a Research Associate at the Private Enterprise Research Center at Texas A&M University. His primary areas of research are labor and public policy economics. Dr. Rettenmaier and the Center's Director, Thomas R. Saving, have presented their Medicare Reform proposal to U.S. Senate Subcommittees and to The National Bipartisan Commission on the Future of Medicare. Their proposal has also been featured in the Wall Street Journal, New England Journal of Medicine, Houston Chronicle and Dallas Morning News. Dr. Rettenmaier is the co-principal investigator on several research grants and also serves as the editor of the Center's two newsletters, PERCspectives on POLICY and PERCspectives.