Study says high cost of drug entitlement would force tax rise

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The prescription-drug benefit Congress is creating for seniors would result in substantial long-term tax increases, according to a new Heritage Foundation study.

"Lawmakers say the drug benefit will cost $400 billion over the next 10 years, but that's a guess," said the paper's authors -- Brian Riedl, a Heritage budget analyst, and William Beach, director of Heritage's Center for Data Analysis. "They're creating a new entitlement, and they need to take a realistic look at what it will cost 15, 20, even 25 years from now."

The two researchers found that the drug benefit would add $2 trillion to the projected $5 trillion shortfall Medicare will face in 2030 and will cost, on average, 40-year-old heads of households an extra $16,127 in taxes between now and the time they retire.

Babies born this year will end up paying $1,125 in extra taxes at the age of 27, in 2030, because of the drug benefit, the analysts found. This will be in addition to the 15.3 percent payroll tax they will pay to fund Medicare and Social Security, plus $2,855 in additional taxes needed to cover the projected Medicare shortfall.

Once mandatory entitlement programs, such as Medicare, are created, the Heritage researchers say, it is difficult for Congress to control its costs. Medicare spending is on pace to double in the next 10 years, and that growth rate will accelerate when the baby boomers start retiring, they contend.

"Adding an expensive new drug benefit will substantially worsen Medicare's already-shaky finances," the paper states.

Congress will have to raise funds to keep Medicare from going bankrupt once the drug benefit becomes law, the analysts say.

Jill Gerber, spokeswoman for Senate Finance Committee Chairman Charles E. Grassley, the Iowa Republican who took the lead in crafting the Senate bill, said the Heritage numbers are "purely speculative" and that lawmakers crafting the final Medicare drug bill are "doing everything we can to keep the cost down."

She said the bottom line is that the Heritage Foundation does not want a prescription-drug benefit for seniors.

"But the president does ... and Congress agrees with him," she said. "We all knew that there'd be a cost."

Others argue that creating a prescription-drug benefit would be much more affordable were it not for President Bush's tax cuts.

Roger Hickey, co-director of the Campaign for America's Future, said the Heritage paper is the "best argument against the Bush tax cuts for the wealthy."

"We've just committed ourselves to trillions and trillions in tax cuts, which most of us think will not stimulate the economy," he said. "That is the obvious first thing to reverse."

But conservatives and the Heritage Foundation say the answer is to target any new drug benefit to only those seniors who truly need it and require traditional Medicare to compete with private plans, which will force the program to become more cost-efficient.

Sen. John Ensign, Nevada Republican, said that although the prescription-drug benefit may "take care of grandparents," there is a real chance it could also "bankrupt our children's future" if it doesn't have real reforms to Medicare and other provisions to hold down the cost.