Economics, Entitlements

When Medicare wipes out Social Security: Healthcare fact of the week

Attention, children and grandchildren of Baby Boomers: save early and save often. Within 75 years, the average monthly premiums required for Medicare and out-of-pocket spending for Medicare-covered services (i.e., deductibles and coinsurance) will equal the average monthly Social Security check (figure 20.7b).

You heard that right. A typical senior counting on Social Security to pay for food, clothing, and shelter will be out of luck. That is, even assuming that Uncle Sam honors the promise to keep sending out Social Security checks, virtually every penny of the average check will be wiped out by the amount seniors will need to pay their premiums for Medicare Part B (outpatient services) and Part D (prescription drugs) and the average amount of cost-sharing paid by a typical senior for deductibles and the 20 percent coinsurance required on Part B services.

Currently, such typical Medicare costs (which do not even include elderly spending on private Medicare supplemental policies or spending on services not covered by Medicare) absorb 30 percent of the typical Social Security check. This is a sea change in the fiscal plight of seniors, and one more reason it is regrettable that the president elected to duck America’s “humongous healthcare problem” in his most recent State of the Union address.

Admittedly, under “current law” the Medicare cost burden facing seniors will grow “only” by about three-fifths between now and 2085. But few people believe current law will stick. According to the Medicare Trustees, “current-law costs are almost certainly understated as a result of the substantial physician payment reductions required under current law and are further understated if the productivity adjustments to other Medicare price updates under the Affordable Care Act cannot be continued in the long range.” This is why the Medicare actuary developed an “alternative fiscal scenario” whose results also are reported in the latest Medicare Trustees report. The most recent report issued by the Congressional Budget Office confirms the credibility of those alternative projections. CBO systematically reviewed all the evidence from Medicare’s past demonstration projects on disease management, care coordination, and value-based payment. This is the same laundry list of ideas that was stuffed into the Affordable Care Act in the expectation that surely one of these might actually bend the cost curve. This expectation appears to have been a triumph of hope over experience, as the CBO analysis concluded “In nearly every program involving disease management and care coordination, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program.” There was exactly one value-based purchasing program (out of four) that saved money.

Also, the 20 percent of seniors who rely exclusively on Social Security income in retirement are subject to lower premiums and cost sharing than others, so the picture for them will not be quite as bleak as shown. Nevertheless, future seniors with supplemental retirement savings who rely on Social Security to help pay at least some bills will be in for a rude awakening.

In short, there are two reasons policymakers need to take seriously the Wyden-Ryan bipartisan proposal to address Medicare’s long-term fiscal unsustainability. Financing the projected growth in Medicare over the next 75 years (which will rise from 3.6 percent of GDP in 2010 to 10.6 percent of GDP by 2085 under the alternative fiscal scenario) will require levels of federal taxation that are unprecedented in this country. There is no public opinion evidence I’ve seen that a majority of Americans (or even close to a majority) wish to be taxed at such levels. Moreover, the Affordable Care Act actually made the challenge of solving the Medicare entitlements crisis much greater by diverting a half trillion in potential savings and using these to expand coverage rather than shore up Medicare. But even if Congress magically could find a way to obtain the revenues to pay for Uncle Sam’s share, there is the inconvenient truth that a substantial fraction of seniors will simply be unable to afford their share of the massive increases in Medicare spending they will face.

The claim that 20-somethings are more likely to believe they will see flying saucers than collect from Social Security is exaggerated. Nevertheless, until and unless policymakers step up to the plate on this issue, those in their twenties (and especially their children) might do well to save as if Social Security will not be around. Should the Supreme Court strike down the Affordable Care Act this June, it might give policymakers a serendipitous opportunity for a do-over.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research, an adjunct scholar at AEI, and an affiliated senior scholar at the Mercatus Center at George Mason University. The charts shown are from his new book American Health Economy Illustrated, to be released in February 2012 by AEI Press. See PowerPoint version of Figure 20.7b and Excel spreadsheet containing estimated Medicare cost sharing obligations as a percentage of average Social Security benefit, 2010 and 2085 for data, sources, and methods.

3 thoughts on “When Medicare wipes out Social Security: Healthcare fact of the week

  1. As a direct result of the “Affordable Care Act,” Medicare “as we know it” has already ended. Medicare patients face reduced access to care, which will be increasingly rationed through relentless payment cuts. Key decisions will be made by an unelected board—the Independent Payment Advisory Board—which will determine specific payments Medicare providers receive and under what circumstances. The Center for Medicare and Medicaid Innovation is tasked with shifting traditional Medicare from fee-for-service into new payment and delivery models that are to be imposed in top-down fashion. Meanwhile, the bureaucracy will metastasize, and doctors and hospitals will face more reams of costly rules and red tape.

    Medicare premium support, long a bipartisan proposal, is the best alternative ( Premium support would guarantee better choices and broader access to quality care, faster innovation in care delivery, less waste and fraud in medical transactions, and superior cost control. For the next generation of taxpayers and retirees, there is no better option than premium support

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>