Is Medicare in Good Shape for the Future?

In 1965, Medicare was signed into law to provide health care for people over 65 and the physically-disabled under 65. In the early years, Medicare was fully funded by Federal Insurance Contributions Act (FICA) taxes, interest earned on trust fund investments, and premiums on people not eligible for Medicare. In 2011, due to people living longer and higher health care costs,
most of the funding for Medicare comes from the general budget.

The United States Census Bureau estimates that in 1960, about 16.6% of the population was more than 65 years old; by the year 2012, Americans over 65 are expected to represent 20% of the population. Medicare costs doubled every four years between 1966 and 1980.

The House Ways and Means Committee calculated that Medicare expenditures were "highly subsidized" and amounted to $256.8 billion for 2002. In 2008, the gross spending for Medicare amounted to $456 billion.

In 2008, the United States economy suffered a severe downturn, which resulted in a tremendous loss of jobs. All tax revenue, including FICA taxes, were lower: a natural cycle that occurs during recessions and depressions.

Many people believe that there is a fictional "lock box" holding all of the money accrued by Medicare payroll taxes. The truth is there is no "lock box." Politicians have a very short-term perspective--the next election. They have long ago spent any money accumulated from FICA taxation. As a result, there are serious concerns about the shape of Medicare's future.

Behind-the-scenes, the number crunchers know that changes must be made. In January 27, 2010, the Congressional Budget Office (CBO) had concluded that there was a problem with rising health care costs. The CBO cited federal health care spending as the "single greatest threat" to the United States' budget stability.

In 2009, the Centers for Medicare & Medicaid Services wrote a report documenting the expected growth of Medicare compared to GDP: by 2010 Medicare would be 3% of GDP and by 2060 Medicare would be 10% of GDP. The total Medicare liability amounts to $80 trillion according to the running tally. This is compared to the 2011 United States GDP of $14.7 trillion.

Based on Organization for Economic Co-operation and Development (OECD) data, the United States spent 15% of its GDP on total health expenditures in 2006; this is higher than any other OECD country. Such high expenditures could lead to reduced worker productivity. From 2008 to 2011, the United States has slipped from #1 in world productivity down to #5.

The original FICA tax is inadequate to pay for future Medicare, so what can be done? New taxes are politically unpopular. In one sense, the Universal Health Care Law was meant to respond to the need for health care reform. The problem is that no real Medicare reform can occur with a dead economy.

In 1965, there were fewer demands on government spending, health care was cheaper, the population over 65 was lower and the economy was growing. By 2011, all of this has changed. In the short-term, the government can shift money around. In the long-term, it needs a real answer to the question: "How can the United States reduce costs while providing health care to seniors?”

Share |