Here's How Congress Can Save Medicare

Robert E. Moffit

Economics, Americas

The usual attempts at entitlement reform won’t work this time.

When will Medicare’s hospital insurance trust fund run out of money? A newly released report from the Medicare Trustees says it will be exhausted in 2028—two years earlier than they projected last year. Using slightly different assumptions, the Congressional Budget Office earlier predicted that the trust fund would be insolvent by 2026.

No matter how you slice it, the fund meets neither short-term nor long-term standards of “financial adequacy” (to use the trustees’ term). But the Trust Fund’s precarious financial state is merely the symptom of a more serious problem: the growth of Medicare spending and financial burdens on seniors and taxpayers.

Consider the raw facts. Over the next ten years, Medicare spending will jump from $648 billion to $1.2 trillion. During the next four years, it will grow faster than workers’ wages, the general economy and all other health spending. Medicare will eat up larger portions of the federal budget, and account for an ever growing chunk of the nation’s gross domestic product. The main driver is, of course, the accelerating enrollment of the seventy-seven million baby boomers.

While payroll taxes fund Medicare hospitalization, general revenues—the taxes of current working families—pay for the vast bulk of Medicare benefits each year. Though seniors often imagine that they “paid” for their benefits, in truth their premiums account for only about 13 percent of the total annual financing. What seniors paid in payroll taxes during their working lives was spent on the Medicare enrollees at the time they were working.