NCPA - National Center for Policy Analysis

Entitlement Programs Will Create a Huge Burden By 2040

June 27, 2003

Unreformed entitlement programs will impose a desperate fiscal crunch on future generations as the number of elderly soars. Also, Social Security, Medicare and Medicaid costs are set to rise so quickly that major budget cuts will be needed across the entire government to avert a massive tax hike on tomorrow's workers, says Chris Edwards (Cato Institute).

  • Without reforms, combined spending on Social Security, Medicare and Medicaid will rise from 8.4 percent of gross domestic product this year to 15.6 percent by 2040, according to Congressional Budget Office projections.
  • If all other government programs stay the same size relative to the economy, the budget will grow from 19.9 percent of GDP in 2003 to 27.1 percent by 2040 -- a 36 percent expansion.
  • If such spending increases were thrust onto taxpayers today, the result would be a huge $778 billion annual tax increase (an increase of 7.2 percent of GDP on today's $10.8 trillion GDP.

Reforms for Medicare and Medicaid should include greater emphasis on paying expenses out-of-pocket, introducing more individual choice and health provider competition, moving from defined benefit to defined contribution structures, and increasing the share of Medicare Part B benefits that are covered by premiums from the current 25 percent, explains Edwards.

Source: Chris Edwards, "The Federal Budget in 2040," Tax & Budget Bulletin No. 15, June 2003, Cato Institute.

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