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The Independent Institute
Commentary

Think Obamacare’s a Train Wreck? Watch Out for Medicare and Medicaid


For all but the willfully blind Obamacare is proving every bit the disaster its critics predicted. Yet, a glance at Medicare and Medicaid (M&M) confirms that Obamacare holds no monopoly in the train-wreck department.

Medicare, a subsidized health program for the elderly, and Medicaid, a provision of the program for low-income Americans, were established in 1965. President Lyndon Johnson (D) pronounced the legislation, the keystone of his Great Society plan, “financially sound.” To say the least, that was a stretch.

Medicare is a pay-as-you-go system, like Social Security. Payroll taxes are not saved and invested, as would have been the case if individuals and their families were responsible for their health care costs in retirement. The program was overly generous to early retirees and continues to provide extraordinary payouts to even average wage earners retiring today.

Medicare converted the health care system for the elderly from a private, family responsibility to a governmental responsibility. It could have been a system to subsidize only those with financial need, but instead legislators extended it to all elderly regardless of need. By reducing the need to save for medical expenses during retirement, the system increased our national consumption and lowered the accumulation of real wealth in society. As a result, Medicare is responsible for decapitalizing the United States.

Medicare led to the greatest increase in nonmilitary government outlays since Roosevelt’s New Deal legislation, which established Social Security. In 2010 M&M spent $793 billion, $92 billion more than Social Security. Although M&M outlays represented 22.9 percent of total federal budget outlays, the current spending levels for M&M are just fender benders compared to what’s ahead.

The oncoming big wreck results from the lack of tax revenues to fund future promises. In the forecast, M&M’s unfunded obligations are enormous, many times the magnitude of the shortfall for Social Security, another government pay-as-you-go folly. The present value of these unfunded obligations is an estimated $36 trillion.

This means that if we are to make good on promises, given our current tax rates, we should have already accumulated $36 trillion in savings from which we could pay the future shortfall. To put this into perspective, this amount is about 2.5 times our current national income and substantially more than the value of all the shares on our nation’s stock exchanges.

Obviously, the massive tax deficiency requires that something will have to give. While deficit spending might tide us over for a while, taxes will have to be raised or costs decreased in the longer run.

So contrary to Lyndon Johnson and his bipartisan supporters, Medicare and Medicaid are not the least bit financially sound. In fact, they rank among the greatest economic blunders of the past century.

Politicians, of course, fail to learn from past mistakes. Faced with fathomless debt and unsustainable entitlements such as Medicare, Medicaid and Social Security, they create vast new entitlements such as Obamacare. This one shapes up as a special kind of blunder.

The disastrous consequences of Medicare took some time to appear. In contrast, Obamacare is a certified train wreck before it even leaves the station. Medically and financially, the nation is now a much unhealthier place.


Burton A. Abrams is a Research Fellow at the Independent Institute and Professor of Economics at the University of Delaware. He is the author of the new book, The Terrible 10: A Century of Economic Folly from the Independent Institute.