Medicare Losses Today and Tomorrow

The single largest transfer payment that the government makes is to the Medicare program. For the calendar year of 2011, the Medicare premium and interest receipts were $306.7 billion, while the expenditures were $549.1 billion, requiring a draw on the general funds of the government of $242.4 billion. Here is the detail, broken down by the three Medicare plans.

Medicare Plans Part A Part B Part D Total
Income (billions) $228.9 $63.4 $14.8 $306.7
Expenditures ($256.7) ($225.3) ($67.1) ($549.1)
Net Loss ($28.3) ($161.9) ($52.3) ($242.4)

 

This gap exists with roughly three times as many workers contributing to the system as are receiving benefits. As the labor force migrates into retirement, this ratio is predicted to deteriorate to 2.5 by 2020 and 2.0 by 2035.

Furthermore, and consistent with the notion of Medicare as a transfer payment, C. Eugene Steuerle and Stephanie Rennane of the Urban Institute have found that most Americans will receive far more from Medicare than they put in. For example, they calculate that the average two-earner couple retiring in 2010 will have paid $116,000 in Medicare taxes and will receive $351,000 in lifetime benefits – triple their contributions.

On a per capita basis, someone who participates in all three plans currently pays $6,555 per year while the system pays out $12,212. Thus to close this gap, the combination of taxes and premiums would have to double. The payroll tax would have to increase from 2.9% to 3.3%. The monthly premiums on B would have to increase from $100 to $400. And people would have to start paying roughly $120 per month for their prescription benefit. It is pretty clear that this is never going to happen.

So what can be done? On the revenue side, an important step has already taken place as part of the Affordable Care Act, which raised the payroll tax by 0.9% on people making more than $200,000 ($250,000 for joint filers), and imposes a 2.9% tax on unearned income for these people. The Joint Committee on Taxation estimates that these measures will raise $184 billion over the next 10 years.

Thus, one of the more obvious steps has already taken place – raising the tax on high earners –  but as we can see from the table above, this won’t even cover one year’s deficit, much less 10 years of deficits. And assuming that there is no political appetite to raise taxes on middle and lower income earners, any future improvement is going to have to come on the expenditure side.

But the forecast for the future paints the opposite picture. Although the growth rate of medical health care spending has declined in the past several years, probably as a result of the decline of employment-based insurance due to the economic downturn in 2008, it is projected to resume its faster-than-the-economy growth rate. Over the next decade the Medicare Board of Trustees is forecasting a 6.2% growth in Medicare expenditures versus a 4.1% growth in the economy. (See Table V.B1. on page 203 in the link)

There is no escaping the reality that unless we find a way to reign in Medicare expenses, the amount of money that we spend on our elderly’s health care will continue to grow as a percent of the economy and as percent of government spending – a harbinger of what we face if and when we move to universal health care.

Frank Trainer, a Hastings Center Board member, oversees several distribution companies and is a member in Balancitta, LLC, an investment partnership. He was director of fixed income at Sanford C. Bernstein & Co.

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