THE $34 TRILLION PROBLEM

March 17, 2008

Ask Alan Greenspan what he considers the greatest threat to the U.S. economy, and he will answer immediately with a single word: Medicare.  Sometime in the next President's first term, Medicare Part A will go cash-flow-negative, and it's all downhill from there, says Fortune magazine.

Medicare provides a wide range of services and subsidies to more than 40 million old and disabled Americans.  As the country ages, Medicare and Medicaid (for those of any age with low incomes) will devour growing chunks of U.S. economic output.  So will Social Security, but its cut of gross domestic product (GDP) should stop increasing around 2030, says Fortune:

  • The federal budget has averaged about 18 percent of gross domestic product (GDP) over the past several decades.
  • If that average holds and if the rules of our social insurance programs don't change, then by 2070, when today's kids are retiring, Medicare, Medicaid, and Social Security will consume the entire federal budget, with Medicare taking by far the largest share.

But wait -- the situation is actually much worse, says Fortune:

  • Those estimates, reported in the latest Financial Report of the U.S. Government, assume that Medicare payments to doctors will be slashed drastically, by some 41 percent over the next nine years, as required by current law. It won't happen, says Colvin.
  • Every year for the past five years, Congress has overridden the mandatory cuts.
  • As for future cuts, the Financial Report says, reductions of this magnitude are not feasible and are very unlikely to occur fully in practice.
  • So in reality, Medicare will go into the hole even faster than official projections reflect.
  • If Medicare had to be accounted for like a company pension fund, it would be underfunded by $34 trillion.

Obviously those long-term scenarios won't happen, because they can't happen -- we won't be shutting down the Army, Navy and so on.  But it's easy to see why the candidates don't want to discuss it, says Fortune.

Source: Geoff Colvin, "The $34 Trillion Problem," Fortune, March 4, 2008.

For text:

http://money.cnn.com/2008/03/03/news/economy/104239768.fortune/index.htm?postversion=2008030405  

 

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