The $34 trillion problem
Medicare is poised to wreak havoc on the economy. And our presidential candidates are avoiding the issue.
(Fortune Magazine) -- Twice I have asked Alan Greenspan what he considers the greatest threat to the U.S. economy, and both times he has answered immediately with a single word: Medicare. He isn't so worried about the trade deficit and the housing crash; he figures market forces will sort them out. But Medicare is something else - a multitrillion-dollar problem that's about to get dramatically worse, and one that nobody wants to talk about. You'd think that the greatest threat to America's economy would be Topic A for the presidential candidates. But it's actually a topic they hate to touch.
Especially now. An analysis of their speeches shows that last year Senators Hillary Clinton, John McCain, and Barack Obama would occasionally mention the Medicare mess. But recently, with the economy slowing and voters feeling insecure, all three candidates have turned more populist: Their economic talking points are about feel-good reassurances, not about facing hard realities.
Unfortunately the day of reckoning is imminent. Sometime in the next President's first term, Medicare Part A (hospital insurance) will go cash-flow-negative, and it's all downhill from there. Medicare provides a wide range of services and subsidies to more than 40 million old and disabled Americans. As the country ages, Medicare and Medicaid (for those of any age with low incomes) will devour growing chunks of U.S. economic output. So will Social Security, but its cut of GDP should stop increasing around 2030. The federal budget has averaged about 18% of GDP over the past several decades. If that average holds and if the rules of our social insurance programs don't change, then by 2070, when today's kids are retiring, Medicare, Medicaid, and Social Security will consume the entire federal budget, with Medicare taking by far the largest share. No Army, no Navy, no Education Department - just those three programs.
But wait - the situation is actually much worse. Those estimates, reported in the latest Financial Report of the U.S. Government, assume that Medicare payments to doctors will be slashed drastically, by some 41% over the next nine years, as required by current law. It won't happen. Every year for the past five years, Congress has overridden the mandatory cuts. As for future cuts, the Financial Report says drily, "Reductions of this magnitude are not feasible and are very unlikely to occur fully in practice." So in reality, Medicare will go into the hole even faster than official projections reflect. And they show that if Medicare had to be accounted for like a company pension fund, it would be underfunded by $34 trillion.
Obviously those long-term scenarios won't happen, because they can't happen - we won't be shutting down the Army, Navy, and so on. But it's easy to see why the candidates don't want to discuss it. As you listen to them, keep three points in mind:
Pain-free remedies won't do the job. All three major candidates, on those rare occasions when they mention Medicare's finances, stress how they'll make the system more efficient, eliminate errors, and improve incentives. That's all wonderful, but it won't be nearly enough. Only John McCain has hinted at what else will be required, including means-testing and limits on benefits. Give him major points, but it's unlikely we'll hear much more on that theme.
Any mention of trust funds is bogus. They're too complicated to explain here, but the bottom line is that no piles of money are socked away to cover future Medicare expenses. Any money the government needs to pay out this year, it needs to take in this year, and every year.
Tax and spending plans must Include Medicare. We'll hear plenty of budget proposals over the next eight months. But without changes to Medicare, they're meaningless. Medicare will eventually overwhelm everything else in the budget, except for the interest on the mushrooming debt to pay for it.