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  • A Health Care Crisis and an Entitlement Crisis

    USA Today’s Dennis Cauchon wrote an insightful front-page story today showing that the cost of government benefits for seniors reached $27,289 per senior in 2007. Social Security, Medicare and Medicaid benefits continue to grow much faster than inflation, and as 77 million baby boomers reach retirement in the coming decades, the taxpayer costs of these programs will be enormous. The article highlights the fact that these programs are unsustainable in their current form and that we are on the leading edge of a large intergenerational transfer of wealth from younger workers to retirees.

    Yet the article quoted AARP’s David Certner as saying, “We have a health care crisis. We don’t have an entitlement crisis.” He is correct diagnosing a health care crisis, but denying an entitlement crisis is absurd. The Congressional Budget Office projects that adding 77 million baby boomers to Social Security will increase costs by 2% of GDP by 2050 (the equivalent of about $250 billion today). To put that in context, repealing the Bush tax cuts would only raise long-term revenues by under 1% of GDP, half of what is needed to fund Social Security’s additional costs. Medicare and Medicaid are projected to grow substantially more than Social Security, and health care costs certainly play a role, but one cannot ignore the demographic realities of adding 77 million baby boomers to Medicare. Even constraining health care costs will not fully solve the entitlement problem, or avert painful choices between historic tax increases or spending cuts.

    In addition, economist Dean Baker is quoted calling the issue “granny bashing” (as if pointing out unsustainable economic trends is a personal attack), and asserts that seniors earned their benefits through lifetime payroll taxes. That is not totally true. Medicare Parts B and D are not pre-funded at all with payroll taxes (they are funded 25% by user premiums, 75% by taxpayers). Social Security and Medicare Part A benefits are pre-funded with payroll taxes, yet for many seniors the benefits received often far outstrip the taxes paid into the system. And future generations paying the same payroll taxes can expect a far worse deal than their parents.

    Posted in Economics [slideshow_deploy]

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