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Rx for a budget bomb?
Critics say the Medicare prescription drug bill could cause explosive budget deficits.
November 24, 2003: 1:13 PM EST
By Mark Gongloff, CNN/Money Staff Writer

NEW YORK (CNN/Money) - Congress may soon pass a plan providing prescription drug coverage under Medicare -- something that some conservative and liberal critics alike believe will plant a time bomb in the federal budget, set to explode when baby boomers start retiring later this decade.

The bill, which looked like it could pass as early as Monday, would give those on Medicare the ability to buy prescription drugs through Medicare for the first time, with a price tag to the federal government of about $400 billion in the next 10 years, according to the Congressional Budget Office.

Such a cost will obviously add to a budget deficit that is expected to hit a record in dollars -- though not as a percentage of gross domestic product -- in 2004. GDP is the broadest measure of the nation's economy.

But the impact on the budget, and the economy, will be far more significant later, starting in 2008, when the first wave of baby boomers -- the group of nearly 80 million Americans born during and after World War II -- begin to retire.

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The $44 trillion hole

"There's a massive build-up of future Social Security and Medicare spending that will explode, and this makes the problem much worse," said Chris Edwards, director of fiscal policy at the Cato Institute, a fiscally conservative think tank in Washington.

"The next generation of young workers will be crushed by gigantic and rising payroll taxes to pay for all of this," Edwards added.

What's more, according to some economic theories, the flood of government borrowing needed to fund the mounting deficit could result in ever-higher interest rates, which would cripple the economy.

Jagadeesh Gokhale, a scholar at the conservative American Enterprise Institute (AEI), has suggested that the shortfall in unfunded future Social Security and Medicare benefits could total a whopping $44 trillion without the prescription drug bill and $51 trillion to $56 trillion with it.

"The Medicare prescription drug benefit advancing through Congress will cost much more, and do less good, than many legislators realize," Gokhale told a congressional subcommittee this summer.

Liberals warn bill could hurt retiree benefits

Typically, one would expect stalwart guardians of fiscal conservatism such as Cato and AEI to object to a big-time government spending bill, just as one might expect liberals to support it.

But the drug bill will likely be a boon to President Bush's re-election plans, according to some political analysts, giving liberals a reason to dislike it and some Republicans a reason to hold their noses and support it.

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Economists at the liberal Center on Budget and Policy Priorities (CBPP), a Washington think tank, wrote in a research note Friday that they have found plenty of other reasons to dislike it, beyond even the potential impact on the budget.

For one thing, CBPP economists pointed out that, "at the apparent behest of the pharmaceutical industry," the bill doesn't provide the government with any way to pay less than retail for drugs, something the Department of Veterans Affairs and the Medicaid program are able to do. In other words, the price tag for the bill will rise just as fast as drug prices.

What's more, the CBPP economists said, the way the bill is designed could make "several million" elderly and disabled Americans pay more for drugs than they already do, could make some of the drugs they get now inaccessible, and could cost about 2 million retirees the drug coverage they already have.

"The legislation is likely to lead to major problems and adverse outcomes on a number of fronts. It is difficult to justify sharply worsening the nation's long-term fiscal outlook to pass such legislation," the economists wrote.

Conservative supporters of the bill -- including former House Speaker Newt Gingrich -- argue it partially reforms Medicare by setting up tax-free health savings accounts (HSAs), which would allow workers to control their own health-care money.

"If you are a fiscal conservative who cares about balancing the federal budget, there may be no more important vote in your career than one in support of this bill," Gingrich wrote in a Wall Street Journal op-ed piece last week.

But Edwards of the Cato Institute argued the HSAs and other conservative reforms didn't go nearly far enough to offset the total costs of the plan, and he worried future lawmakers could be tempted to remove such programs, especially if Democrats regain control of Congress.

Supporters of the bill also say that its problems can be fixed later, with future legislation, an argument rejected by most critics.

"Will Rogers once said, 'If you find yourself in a hole, the first thing to do is stop digging.' Medicare is in a deep hole," Leonard Burman, a senior fellow at the non-partisan Urban Institute and co-director of the Urban-Brookings Tax Policy Center, wrote last week. "Maybe it is time to stop digging."  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.