By Eric Fruits, Ph.D.
“So don’t pay attention to those scary stories about how your benefits will be cut, especially since some of the same folks who are spreading these tall tales have fought against Medicare in the past and just this year supported a budget that would essentially have turned Medicare into a privatized voucher program.”
President Barack Obama
Speech to a Joint Session of Congress
September 9, 2009
It seems that private sector health care is the only thing Washington hates more than waste, fraud and abuse in government-run health care. In his speech to Congress, President Obama used the word “voucher” in a way that his pollsters must have said would invoke visions of a private sector boogieman coming in to pull the plug on grandma’s Medicare. In reality, Medicare’s unsustainable system of funding and spending may cause the system to pull its own plug and pull the U.S. economy down with it.
Even though Medicare calls itself a “Trust Fund,” the system is not an ironclad lock box. Instead, it is a “pay-as-you-go” system in which today’s workers are taxed to pay for today’s spending. Economists call this a generation transfer system because younger workers transfer a portion of their earnings to the older generations collecting benefits.
The amount of money spent on a Medicare beneficiary is not tied in any way to his or her previous work history or previous Medicare tax payments. Add to this the fact that Medicare will pay any bill with valid-looking claims numbers, and it is no wonder beneficiaries love Medicare. It’s an all-you-can-eat health care buffet with someone else picking up the tab. And the tab is getting bigger rapidly. Even the government knows it cannot keep paying these rising bills. Medicare’s trustees forecast that the system’s hospital insurance “trust fund” will become insolvent by 2017. In his address to Congress, the President declared that “our health care system is placing an unsustainable burden on taxpayers” and that, without reform, the U.S. eventually will be spending more on Medicare and Medicaid than every other government program combined.
The present funding mechanism for Medicare is unsustainable. It is built on the premise that a large base of workers would support a relatively small group of retiree-beneficiaries. Around the time Medicare was established in 1965, four workers supported one retiree. Today, the ratio is approximately 3-to-1. By the time a child born today hits the workforce, there will only be two workers supporting each retiree. On top of this, today’s children””tomorrow’s workers””will face stiff challenges to fund the obligations imposed on them by their parents and grandparents. Economists are in widespread agreement that the recent recession and the government’s attempts to use massive spending to pull the U.S. out of recession means that younger generations will face diminished job opportunities, higher taxes and rising inflation. Even if the massive health system overhaul currently being discussed in Washington sputters out with nothing more than increased insurance mandates, something must be done about Medicare. Its system of funding and spending are unsustainable and will drag the U.S. economy down to Europe’s lackluster levels of growth.
A pay-your-own-way system of individual accounts would solve both Medicare’s funding problem and its spending problem. In exchange for funding their own health care expenses, savers could be rewarded with tax deductions or an offset to Medicare payroll taxes. Even if Medicare continues on its explosive spending path, today’s young workers could replace Medicare with a pay-your-own-way account if they put less than $2,500 a year into their own personal accounts.
Individual accounts, however, will curb the explosion of Medicare costs such that individual contributions to their accounts may be less than $2,500 a year. One study finds that contributions as low as $1,500 a year would be sufficient. Individual accounts solve the spending problem because the beneficiary regains his or her power as a consumer. He or she can weigh the costs and benefits of the products and services available. Instead of an all-you-can-eat buffet, Medicare would transition to a pay-per-plate cafeteria of private insurance, co-payments and consumer choice. Consumers excel at detecting waste and fraud when they are footing the bill. The result would be lower health care spending with no decrease in health care service.
Medicare benefits are a windfall to today’s retirees paid by today’s workers. Unfortunately, demographics and economic reality are conspiring to put an end to the bonanza. A pay-your-own-way system of individual accounts will ensure that today’s workers receive high quality medical care when they become tomorrow’s retirees. More importantly, they won’t have to worry about bankrupting their children and the nation.
Dr. Eric Fruits is a financial economist and statistician, and president of Economics International Corp., an economics consulting firm based in Portland, Oregon. He is also an adjunct professor in the School of Urban Studies and Planning at Portland State University, and an adjunct scholar with Cascade Policy Institute in Portland. Dr. Fruits earned his Ph.D. and M.A. degrees in economics from Claremont Graduate University, and his B.S. in business economics and public policy from Indiana University. For more information on Dr. Fruits and Economics International, see http://www.econinternational.com/.