NCPA - National Center for Policy Analysis

Plan For A Better Medicare

January 20, 1999

Public attention is focused on Social Security, but the financial problems of Medicare are twice as big, say economists Andrew J. Rettenmaier and Thomas R. Saving. They propose putting the program on a secure financial basis -- and giving seniors more health care choices -- by prefunding health care with accumulated savings.

The present value of the shortfall in Social Security funding over the next 75 years is about $4.3 trillion. The unfunded liability in Medicare over the same period is $8.9 trillion -- greater than the country's entire current output of goods and services.

Like Social Security, Medicare is mainly a pay-as-you-go system financed by a payroll tax: today's workers pay hospitalization benefits for today's retirees. In addition, seniors pay premiums equal to about 25 percent of the cost of Medicare Part B (which covers physicians' fees and office visits), while the federal government kicks in 75 percent. If nothing is done, the tax burden for Medicare may rise from about 5.35 percent of total payroll today to almost 14 percent.

Instead, Rettenmaier and Saving propose that each generation of retirees pay its own way:

  • Workers would deposit a portion of the tax dollars they now pay for Medicare into Personal Retirement Insurance for Medical Expenses (PRIME) accounts.
  • All individuals in the same age groups would make the same size deposit, and the government would make up the difference for low-income workers.
  • Sometime before retirement, people would use their PRIME account funds to purchase health insurance -- choosing among competing private insurers.
  • Funds not used for health insurance could be deposited in a Medical Savings Account (MSA) to pay small medical bills, for so-called Medigap insurance and long-term care.

They say that young people entering the labor market today would need to deposit only about $600 a year -- about half of what the average worker will pay in Medicare taxes, including Part B premiums, under the current system.

Source: Andrew J. Rettenmaier and Thomas R. Saving, "Saving Medicare," NCPA Policy Report No. 222, January 1999, National Center for Policy Analysis, 12655 N. Central Expwy., Suite 720, Dallas, Texas 75251, (972) 386-6272.

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