Social Security is not the only entitlement program whose future poses great budgetary problems as the vanguard of the baby-boomer generation begins retiring before President Bush completes his second term. As Congressional Budget Office Director Douglas Holtz-Eakin has frequently observed, solving Social Security’s problems would be helpful in generating the necessary policy momentum that will surely be required to deal with Medicare.
With last week’s simultaneous release of the trustees’ reports for each program, however, there can be no doubt that Medicare presents far greater long-term challenges than Social Security does. In fact, a fair reading of the Medicare report confirms that the program continues to hurtle out of control. As a summary of the two reports declares: “Medicare’s financial difficulties come sooner — and are much more severe — than those confronting Social Security.” The arithmetic is straightforward: “[W]hile Medicare’s annual costs are currently 2.6 percent of [gross domestic product], or about 60 percent of Social Security’s, they are now projected to surpass Social Security expenditures in 2024 and reach almost 14 percent of GDP in 2079,” when Social Security “is projected to rise to 6.4 percent of GDP.”
Medicare has three major components. Part A, comprising the Hospital Insurance (HI) Trust Fund, pays for hospital care and is financed by a 2.9 percent payroll tax shared equally by employees and employers. Part B, which pays doctors’ bills and other outpatient expenses, is financed by premiums paid by beneficiaries (25 percent of costs) and general tax revenues (75 percent of costs). The new Part D, beginning in 2006, will pay for access to prescription-drug coverage and will be financed by beneficiary premiums (12 percent), state transfers (10 percent) and general tax revenues (78 percent).
The present value of the unfunded obligations of the HI Trust Fund is $8.6 trillion over the next 75 years (more than twice Social Security’s). Part B’s share of GDP will increase from 1.2 percent in 2004 to 4.9 percent in 2080. Because general revenues finance 75 percent of Part B’s costs, Part B will require additional general revenues equal to 2.8 percent of GDP by 2080 — or nearly $350 billion per year in today’s dollars. Meanwhile, a whopping $8.7 trillion is the present value of general revenues required through 2079 to fund Part D, Medicare’s prescription-drug program that will become effective next year. That is more than twice the size of Social Security’s $4 trillion unfunded obligation over the next 75 years.
While we understand the administration’s strategy to address the more soluble problems of Social Security first, Medicare’s “severe” problems cannot be ignored.
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