Heres some bad news: The latest report of the Social Security and Medicare trustees shows an unfunded liability for both programs of $63 trillion. That is equal to about 4.5 times the entire U.S. gross domestic product.
The unfunded liability is the amount we have promised in benefits, looking indefinitely into the future, minus the payroll taxes and premiums we expect to collect. Its the amount we must have in the bank today, earning interest, for these entitlement programs to be solvent.
We not only dont have the money in the bank, no one has a serious plan to put it there.
Nowsome really bad news. The actual liability is almost twice what the government is reporting. In 2009, the trustees calculated the two programs unfunded liability at about 6.5 times the size of the U.S. economy. But the next year the unfunded liability was cut in half. The reason: Obamacare. The minute President Barack Obama signed his health reform bill, he cut Medicares unfunded liability by more than $50 trillion.
You would think this accomplishment would be an occasion for great joyfor dancing and celebration in the streets. If youre like most Americans, however, you probably havent heard about it. Certainly, the Obama administration isnt talking.
Here is whats going on: Obamacare uses cuts in Medicare to pay for more than half the cost of expanding health insurance for young people. So even if the Medicare cuts take place, they wont reduce the governments overall obligations. They just replace entitlements for seniors with entitlements for young people. In addition, the health reform bill contains no serious plan for making Medicare more efficient.
So the only realistic way to make cuts in Medicare spending is a mechanism that will pay less and less to doctors and hospitals over time.
The Center for Medicare & Medicaid Services Office of the Actuaries has predicted what this can mean for seniors. By the end of this decade, the fees that Medicare pays to doctors will be lower than what Medicaid pays. From an economic view, seniors will represent a less profitable sector than welfare mothers represent. Also by the end of the decade, one in seven hospitals will be forced out of business. In the decades that follow, the consequences only seem to get worse.
Many serious people inside the Beltway believe these cuts will never take place, however. The reason: Congress has been unwilling to allow similar reductions in doctor fees for nine straight years under previous legislation.
In fact, the possibility of Obamacare policies cutting Medicares unfunded liability in half is so unlikely that Medicares chief actuary, Richard Foster, provides an alternative report, in addition to the official trustees report, in which he projects much higher levels of Medicare spending.
What about the Medicare trust fund? Workers have been repeatedly told that their payroll taxes are being securely held in trust funds. But they are actually spent the very minute they arrive in the Treasurys bank account. No money has been saved. No investments have been made. No cash has been stashed in bank vaults. Todays payroll tax payments are being spent to pay medical bills for todays retirees. And if any surplus materializes, it is spent on other government programs. As a result, when todays workers reach the eligibility age of 65, they will be able to receive benefits only if future taxpayers pay (even higher) taxes to support them.
To address these defects, Medicare must be truly reformed. That means shifting from the current pay as you go system to one in which workers pay their own way.
My colleagues and I have calculated that workers (and their employers) must save and invest 4 percent of payroll. Eventually, we will reach the point where each generation of retirees will pay for the bulk of its own post-retirement medical carewith a payroll tax no higher than the one we have today.
We also need other reforms, of course. Seniors should be free to manage more of their own health care dollars. Doctors should be free to repackage their services in ways that lower the cost to patients and raise the quality of care. Seniors should also have access to more services, whose price is set in the marketplace rather than dictated by governments.
Most importantly, we need bipartisan commitment from those on Capitol Hill who can make all of this happen.