The Real Costs of Medicare - A Fiscal Nightmare

Unsustainable Medicare system lurks beneath debt talks

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    NEWSLETTERS

    On a crash-course to financial havoc. That's how many economists have described our current economic situation. But instead of ironing out a deal to address our debt, politicians in Washington have mostly been haggling over tax rates. As Sam Brock reports in this "Reality Check," taxes might be in the political crosshairs, but it's a different topic that should be grabbing your attention.

    Without a deal yet brokered on the so-called fiscal cliff, millions of Americans are fretting over the possibility of higher tax rates.

    In fact, the level Congress targets for higher rates -- Speaker Boehner has offered $1 million and up,  President Obama has countered with $400,000 -- has largely dominated prickly negotiations over addressing the nation’s debt.

    “Taxes are definitely going up,” said Raj Kumar, a Bay Area resident out to lunch in Palo Alto on a sunny Tuesday afternoon. “And all of the middle-income earners are going to bear the burden.”

    As Kumar spoke, his friend, Kingdom Iweajunwa, nodded his head.

    “If they can do something to make sure that taxes don’t jump for everyone, immediately, that would be the most important thing to me,” Iweajunwa said.

    As much as Americans loathe the idea of paying higher taxes, however, the widespread tax cuts implemented under President George W. Bush are hardly the primary driver of our financial troubles.

    Consider the following fact: If all the Bush era tax cuts set to expire at the end of 2012 remain untouched, the federal government will recoup $156 billion a year.

    Throw in the payroll tax holiday, a failure to address the Alternative Minimum Tax, some incentives for business growth, and various other tax increases, and you get a total savings of about $500 billion. That sum, essentially, represents the ‘fiscal cliff.’

    That figure -- $500 billion -- is approximately what the U.S. spent on Medicare in 2011, and the costs are expected to rise, sharply, in the coming years.

    “Medicare is probably *the biggest problem, and Medicaid is probably the second biggest problem,” said Professor David Henderson, research analyst for the Hoover Institution and a health care policy expert.

    "The long-term problem with Medicare is much greater than whatever tax increase we’re talking about now,” Henderson added.

    If you don’t trust the professor’s analysis, just take a glance at the Congressional Budget Office’s projections for entitlement spending over the next 25 years.   

    The CBO estimates Medicare will grow from its current size, 3.7 percent of gross domestic product, to a whopping 6.7 percent of GDP. 

    If that growth were to occur, Medicare would become our country’s most expensive entitlement program.

    To demonstrate how striking the numbers are, let’s look at the projections in today’s dollars:

    The percentage of Real GDP represented by 3.7 percent is $504 billion. Should Medicare climb up to 6.7 percent, the total sum would jump to $912 billion.

    Henderson attributes Medicare’s spiraling costs to a couple of factors, one of which can’t be controlled-

    an aging population that is living longer. Henderson also cited higher medical costs as a contributor to the looming Medicare crisis.    

    A recent study performed by the Urban Institute, however, shines the light on another glaring problem with Medicare- Americans are receiving three times the amount in benefits that they’re paying in taxes.

    “I wondered if that could be right when I looked at it,” Henderson said, when asked about how preposterous that model sounds.

    “And when I saw the author’s name, Eugene Steuerle, and I saw his methodology, I thought that probably is right.”

    Steuerle assumed an inflation rate of 2 percent, and calculated that the single man making an average wage pays in about $61,000 in Medicare payroll taxes over his life, and receives $180,000 in benefits, in today’s dollars. 

    Likewise, the study found that a couple making average wages would pay in $122,000 over the course of their lifetime, and net $387,000 in benefits.

    So this, then, is our Medicare system, a program that pays out three times the benefits that it takes in?

    “It’s not sustainable,” Henderson said. “And that point, again, pops up when we see that 3.7 percent going up to 6.7 percent. It’s not sustainable.”

    Congressional leaders have discussed means-testing Medicare, which means wealthier earners would contribute more in taxes to receive the same benefits.

    But thus far that idea has only been broached in negotiations, with no concrete sign it will be included in a debt deal.

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