AN UNFUNDED LIABILITY EXPLOSION

May 21, 2009

Recently, the Social Security and Medicare Trustees released this year's annual report on the economic health of both programs.  Unfortunately, the Trustees and the financial press ignored the massive unfunded liability that is being created for future generations, says John C. Goodman, president and CEO of the National Center for Policy Analysis.

According to the Medicare Trustees:

  • Medicare's expected future obligations exceeded premiums and dedicated taxes by $89 trillion. 
  • In other words, Medicare's liability is about 5 1/2 times the size of Social Security's ($18 trillion) and about six times the size of the entire U.S. economy. 
  • Throw in Medicaid, and health care spending alone will crowd out every other thing the federal government is doing by mid-century, says Goodman.

Clearly we are on an unsustainable path.  How can we get off of it, asks Goodman?

  • First, we must move from a pay-as-you-go system to a funded system; instead of having each generation of retirees look to the next generation of workers to pay for its benefits, each generation must pay its own way.
  • On the demand side, Medicare beneficiaries are currently participating in a use-it-or-lose-it system in which they can realize benefits only by consuming more care; they receive no personal benefit from consuming care prudently, and they bear no personal cost if they are wasteful.
  • On the supply side, Medicare providers are trapped in a system in which they are paid predetermined fees for prescribed tasks; they have no financial incentives to improve outcomes.

With these three reforms, the Medicare tax burden would be no greater in 2050 than it is today.  However, this solution only works if we begin the reform soon.  The longer we wait, the more costly and painful reform will be, says Goodman.

Source: John C. Goodman, "A Medicare Explosion," Forbes, May 19, 2009.

For text:

http://www.forbes.com/2009/05/19/medicare-ticking-bomb-opinions-contributors-goodman.html

 

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