NCPA - National Center for Policy Analysis


May 9, 2007

A recently released report by the trustees of the Social Security and Medicare system found that Medicare and Social Security combined are on track to eat up the entire federal budget, says Thomas R. Saving, public trustee of the Social Security and Medicare system, director of the Private Enterprise Resource Center at Texas A&M University and a senior fellow at the National Center for Policy Analysis.

The projected cash flow deficits in these two programs are staggering, says Saving:

  • For Social Security, the trustees estimate the 75-year burden on general revenues at $6.7 trillion.
  • For Medicare the comparable burden on general revenues is $24.2 trillion, even after allowing the current transfers to grow with the economy.
  • Thus the total burden these programs will impose on federal finances over the next 75 years is $31.9 trillion, more than six times the current outstanding federal debt.
  • Looking beyond 75 years into the indefinite future, the combined long-run funding gap for Social Security and Medicare is $74.8 trillion in today's dollars.

So what can be done?  On the supply side, the way health care is produced must fundamentally be changed, replacing cost-increasing innovations with cost-reducing ones.  For example:

  • Reforming Medicare based on a $5,000-deductible Health Savings Account (HSA), beginning with the baby boomer retirees.
  • The size of the deductible and the HSA would grow through time (as health costs grow) and since deposits would be made with after-tax dollars, withdrawals for any purpose would be tax free.
  • In this way, beneficiaries would be encouraged to make their own tradeoffs between health care and every other good or service.

Even with these reforms, however, we must still address the problem of pay-as-you-go financing, says Saving. Yet the alternative, a funded system, must take advantage of the earning potential of the baby-boom generation before they escape into retirement and leave the young with a burden that will be increasingly burdensome, says Saving.

Source: Thomas R. Saving, "Medicare Meltdown," Wall Street Journal, May 9, 2007.

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