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2004 March 24 Wednesday
On The Medicare And Social Security Unfunded Liabilities

There are two reasons why the era of the United States as most prosperous and dominant world power is going come to an end in the first half of the 21st century. One obvious reason is the continued rapid economic growth in the far more populous China. The other reason is that the United States internally faces very unfavorable demographic trends. The two biggest unfavorable trends are in the pattern of immigration and the aging of the population. Robert E. Moffit, Ph.D., and Brian Riedl of the Heritage Foundation provide a good overview of the grim financial outlook for Social Security and Medicare.

Title I of the Medicare Prescription Drug Improvement and Modernization Act of 2003 creates a new and complex universal prescription drug entitlement. According to the latest Medicare trustees report, the Medicare hospital insurance program will be exhausted in 2019, seven years earlier than the past yearís estimate.[1] But that is just the tip of the iceberg. The hospital insurance trust fund does not include the new drug entitlement, and that alone will add $8.1 trillion to the programís long-term unfunded liabilities over the next 75 years.[2]

Medicareís massive costs will result in huge tax increases. According to Medicare Trustee Thomas R. Saving, a professor of economics at Texas A&M University and senior fellow at the National Center for Policy Analysis, the Medicare program is now projected to consume:

  • 24 percent of all federal income taxes by 2019 and
  • 51 percent of all federal income taxes by 2042.

The true cost of the drug entitlement expansion is unknown, and the trustees could be understating the real cost. When the new Medicare law was enacted in 2003, the Congressional Budget Office (CBO) estimated the 10-year cost at $395 billion. Less than three months later, the White House Office of Management and Budget (OMB) revealed that it estimated the 10-year cost at $534 billion.[4]

As irresponsible and deceitful (see below) as the Bush Administration has been while getting the Medicare drug benefit bill enacted the Democrats wanted something that was even worse:

Ironically, the entire financial situation could be far worse. During the debate on the new drug entitlement, Democrats offered proposals that would have cost nearly $1 trillion in the first 10 years,[6] far in excess of anything proposed by the Administration or the congressional leadership. Many critics of the new drug program actually want a more expensive program.

Keep this in mind as we hear Democratic Party Congressional figures criticize the Bush Administration on Medicare. There's no good side in this fight.

The financial projections on Medicare's future have deteriorated drastically in just the last 2 years.

As recently as 2002, Medicare's projected insolvency date was 2030 and trustees said the program wouldn't need to tap its reserves until 2016. Last year, trustees advanced the dates to 2026 and 2013, respectively.

Now the bankruptcy is expected in 2019 and Medicare is already dipping into its reserves this year.

The government health care program for older and disabled Americans will have to take $7.5 billion from its reserves this year to meet its expenses, government trustees said Tuesday in their annual report.

The new Medicare drug benefit alone has a bigger unfunded liability than Social Security.

In a briefing Tuesday on Capitol Hill, NCPA Senior Fellow and Social Security and Medicare Trustee Thomas R. Saving reported that:

  • Social Security faces an unfunded liability of $10.4 trillion.
  • Medicare's unfunded liability is $61.6 trillion - six times greater than Social Security's.
  • The prescription drug benefit alone faces a funding gap of $16.6 trillion - more than 50 percent greater than Social Security's.
  • By 2020, the combined deficits in these programs will consume more than one-fourth of all federal income taxes.
  • By 2030, about the midpoint of the baby boomer retirement years, deficits in the two programs will consume more than half of all federal incomes taxes.
  • By 2050, when today's college students will reach retirement age, Social Security and Medicare will require more than three- fourths of all income taxes just to pay benefits currently promised.

The Concord Coalition folks say "short-sighted fiscal policies tend to ignore ballooning long-term costs".

"The new Medicare projections underscore the extent to which short-sighted fiscal policies tend to ignore ballooning long-term costs. Arguing over whether the prescription drug benefit will cost $400 billion or $530 billion in the next 10 years diverts attention from the fact that Congress and the President have added a massive new obligation to a program that already had a serious long-term funding problem," said Bixby.

In total, Medicare and Social Security are now projected to cost nearly 15 percent of GDP by 2040. To put that number in context, if we spent 15 percent of GDP on these two programs today they would consume 95 percent of all federal revenues.

Bush is trying to get reelected by buying the support of old folks using our money.

The full report on Medicare is available on-line here as the 2004 Annual Report of the Boards of Trustees of the Hospital Insurance and Supplementary Medical Insurance Trust Funds.

Serving as a backdrop of the new report on Medicare and Social Security financial problems is the Medicare drug benefit bill cost scandal.

Richard S. Foster, the chief actuary for the Centers for Medicare and Medicaid Services, which produced the $551 billion estimate, told colleagues last June that he would be fired if he revealed numbers relating to the higher estimate to lawmakers.

Foster says his boss ordered him to withhold from Congress higher cost estimates for various aspects of the Medicare drug bill then over consideration.

He said Thomas A. Scully, then administrator of the HHS agency that oversees Medicare, repeatedly told him last spring and summer that Foster would be fired if he complied with requests from Republican and Democratic lawmakers to provide cost estimates of aspects of the prescription drug legislation. Although other HHS officials ultimately assured him his job was safe, Foster said, the administration's practice of withholding budget predictions continued until the legislation was enacted in November.

In classic MRD "Well, he would say that, wouldn't he?" (which is apparently an enhanced misquote) fashion Department of Health and Human Services Secretary Tommy G. Thompson says the buck stops at Thomas A. Scully and not higher up at his desk or in the Oval Office.

"There seems to be a cloud over the department because of this," Thompson said. He predicted the agency would be exonerated. But he also lashed out at a recently departed top assistant, blaming the episode on Thomas A. Scully, who ran the Medicare program for three years and was a key administration negotiator on changes to the program that narrowly passed Congress in November.

Joining in with the MRD style is an off-the-record White House official who has the temerity to call Richard Foster irresponsible.

A Bush administration official suggested this week that it was irresponsible for Foster to make such assertions without proof. The official added that actuaries must support their cost estimates with a clear rationale, but maintained that Fosterís claims about the White House were based on sheer speculation.

The Bushies have no shame. Why would Scully take it upon himself to suppress Foster's numbers? What would be his motive? White House and Thompson claims about this sound very implausible.

Deroy Murdock sees the deception and attempted bribery associated with the passage of the Medicare drug bill as a sign that the United States is sliding toward higher levels of official corruption.

The Tanzanianization of America proceeds apace.

This word encapsulates Washington's steady slide from transparency, the rule of law, and first-world political norms toward an equatorial standard of public integrity. Tanzania, among Earth's most corrupt nations, foreshadows the ultimate destination of America's government.

The leaders of the United States lack a sufficient amount of virtue to face and competently deal with the biggest problems facing the republic and the US is going to decline as a result.

Also see my previous posts Social Security And Medicare Headed For Bankruptcy Sooner, Niall Ferguson: European Politics A Dance Of Death, and Collapsing European Populations: Time To Reverse Aging.

Share |      By Randall Parker at 2004 March 24 03:59 PM  Economics Demographic


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