Medicare Train Wreck

A few weeks ago I said:

Medical expenses now eat 16% of U.S. G.D.P.  That percentage has doubled every thirty years; it was 8% thirty years ago, and 4% thirty years before that.   It will probably double again, to 32%, in the next thirty years. 

For many years policy makers have warned of an upcoming "Medicare Train Wreck," when rising medical costs collide with a surge of retiring baby boomers.  Wednesday’s Wall Street Journal reminds us again:

A recently released report by the program’s trustees found that within seven years Medicare taxes will fall short of Medicare expenses by more than 45%. … Until a few years ago, Social Security and Medicare were taking in more than they spent, on the whole. Thus they provided revenue for other federal programs. That situation is now reversed, and last year the combined deficits in the two programs claimed 5.3% of federal income tax revenues.  In 15 years these two programs will require more than a fourth of income tax revenues: … By 2030, … these two programs will require almost one out of every two federal income tax dollars.

If the world stays relatively boring, this will be the biggest US politics issue over the next twenty years.  The key questions:

  1. Who will pay: raise taxes, limit treatments covered, tax docs, or cut off the richer & younger?
  2. Who will be blamed: docs, the old, the young, the rich, the poor, Republicans, Democrats, corporations, immigrants, foreigners?

Added:  Income tax is only half of federal taxes, but most of Medicaid, which is about as big as Medicare, also goes to the elderly. 

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  • anonymous

    Maybe we can start with cutting off medicare to people who aren’t even US citizens. Any economists want to weigh in on the medicare resources illegal immigrants use each year versus how much they pay in?

  • I see we have one vote for blaming immigrants, who tend to be younger and so use Medicare less than others.

  • Buzzcut

    We could do a couple of things right off the bat:

    1) Make benefits taxable income (best way to means test)

    2) Raise age of eligibility over time, just like we’re doing with Socialist Insecurity.

    Is that “cutting off the richer and the younger”?

    How about taking the floor off the death tax? Make it apply to ALL estates, not just those of the rich. Unlike the rich, the middle class isn’t financially sophisticated enough to shield their assets with trusts. This could generate a ton of revenue for Medicare. And since Medicare itseld shields the estates from the costs of medical care, it seems like an even swap to me.

  • Robin:
    “I see we have one vote for blaming immigrants.”

    We see that you make no differentiation between legal and illegal.

    More to the point, this is a perfect example of how socially and economically corrosive welfare really is. The federal govt was never intended to provide welfare to the citizenry, but now that the door has been opened to the federal coffers, there’s not much hope in it ever being closed again.

    So, um, . . . make that one vote for limiting treatments and blaming the govt as a whole.

  • We could not worry too much about it, because we can’t predict what the world will look like in 30 years, given exponential growth in technology. After reading Kurzweil’s The Singularity is Near, I’m convinced that the world will be a dramatically different place in 30 years. Odds are that all current leading causes of death from illness will be cured and that healthy lifespans will be considerably longer.

  • anonymous

    Actually, Robin, I really am curious to find out if illegal immigrants are a net cost or benefit to the US economy. In California, I know that there is a huge problem with illegal immigrants crowding emergency rooms and costing the state hundreds of millions of dollars. However, and here is where I would like to hear from some economists, how much illegal immigrants benefit our economy and what would happen without them. Do they benefit our economy more than they cost our social welfare programs. I think that is a very valid question and should in no way be taken as a vote for blaming immigrants; I am trying to look at the big picture.

  • TGGP

    Robin, despite being in favor of immigration restriction, I agree that immigrants are not the main culprit to be blamed. However, I say that because the problem would still exist in their absence. Your point that “immigrants tend to be younger” strikes me as irrelevant. Immigrants age just like anyone else. An immigrant that is working and seems an asset now will in a matter of time become a senior and part of the medicare problem.

  • joe

    What makes you so sure they are an asset now anyway?

  • Ian B Gibson

    How about taking the floor off the death tax? Make it apply to ALL estates, not just those of the rich. Unlike the rich, the middle class isn’t financially sophisticated enough to shield their assets with trusts.

    Or alternatively, how about closing the loopholes so the feckless offspring of the rich have to submit to at least a modicum of the imagined meritocracy that is the ostensible ideal of this country?

  • I can think of at least one way to sharply cap medical costs which is simple, effective, and would actually save lives relative to the current system. The flaw is that it is so rational as to be, politically, absolutely impossible.

    In fact, there is no politically feasible option except spending and spending and spending, because life and health are sacred values that can’t be traded off against mere money. So I guess instead the US economy will halt, melt, and catch fire.

    (Remember, kids, Just Say No to Healthcare.)

  • Sandman

    I would like to see a system in place such that existed in the excellent movie, Logan’s Run. Each individual is fitted with a pretty glowing crystal on the palm of their hand shortly after birth. Through the life phases and color changes of the crystal, one’s healthcare expenses are completely covered by the government. Around age 30, when one’s best productive years are fading fast, the crystal begins to flash red- WARNING! You can no longer ‘feed into’ the system and the system can no longer support you. Time for Carousel. It could work!

  • Keith Elis

    The income tax generates only about half of all Federal tax paid. The rest comes largely from payroll, corporate, estate, and gift taxes. So, don’t be misled when you read “By 2030, … these two programs will require almost one out of every two federal income tax dollars.” This represents only a quarter of all Federal tax revenue. It’s still a lot, but not exactly a train wreck.

    Furthermore, these dire predictions assume that as Medicare/Social Security expenditures increase due to aging boomers, these same boomers are exiting the workforce at their social security retirement age. This is a conservative assumption, but why should reality conform to the arbitrary retirement ages granted by social security? There are reasons to think boomers will keep on working.

    The top 20% of income producing workers have no reason to stick to the retirement tables used by the SSA, and such workers pay a disproportionate amount of income tax. A worker making $200K per year cannnot retire on social security without a severe impact on lifestyle. For a highly paid worker to retire, they need roughly $200K in assets per $10K of desired retirement income per year (at a conservative 5% APR). For a worker making $150K per year, they will want to have $2M in assets to live on at least $100K per year indefinitely. The S&P500 index is only just recently back near its pre 9/11 highs so this has delayed many boomers retirement plans by an average of 7 years or so (2007-2000). This delays retirement, on average, from 67 to 74. We would have had a much bigger problem for Medicare and social security if the 90s bull market never ended and everyone 55 and over retired in 2005 with millions.

    Other reasons to think boomers will keep working: First, one of the benefits of longer lifespans is a greater number of productive working years. We just feel healthier for longer, and so boomers have the option in many cases to work right into their 70s if they want to. Second, the US economy is not the industrial and manufacturing giant it once was. The jobs out there are just a lot less physically taxing than they used to be. no less stressful perhaps, but at least not requiring heavy lifting and strong backs.


  • Tom McCarran

    Though welfare can lead to a sense of entitlement, and it would be easy to predict a downward spiral of increasing welfare costs, it seems to me that even voters with a strong sense of entitlement will be able to eventually understand the huge damage that Medicare would cause as it balloons. I believe that it will not be a political impossibility to curtail payments and achieve a reasonable balance. However, it will take a crisis of some sort to bring about the necessary changes.

    Though immigrants certainly represent a drain on the system, I believe that it is the system, not the people who use it, that we should be worried about.

    I find Tim Lundeen’s post about the Singularity to be disturbing. It would also be easy to claim that we need not worry about the world 30 years from now because the Rapture is coming in 10. Though the Singularity is a very appealing idea, it cannot become an excuse to write off real-world problems. The current trend seems to be that medicine is improving and costs are rising. Even allowing for further great leaps in medicine, I don’t see why this trend should not continue.

  • Smell The Glove

    Urine is poison when ingested. Sad but true.

  • Keith, good point about the income tax being only half of all taxes. Yes the temptation to retire later will rise, but the Medicare benefit will also rise, making people less willing to voluntarily give up such a large benefit.

    On immigrants, since Medicare is basically a transfer from the young to the old, the fact that immigrants (both legal and illegal) are much younger than others is all that economists need to know to be confident that immigrants make the problem easier, not harder.

  • anonymous

    Sure, it might be easier right now, but what does happen when they become older?

    Perhaps this is off-topic since we are restricting ourselves to Medicare here, but what about the Medi-Cal program, California’s version of Medicaid, which pays out nearly 1 billion per year in benefits to illegal immigrants in California?

    What is the net effect of illegal immigration taking ALL factors into consideration?

  • TGGP

    joe, you are right that immigrants appear to be tax-eaters. Robin, the point I was making is that immigrants are only young NOW, unless they are getting killed off pre-maturely (which I think and hope is not the case) they will inevitably come old later. Then medicare will transfer TO them rather than FROM (assuming immigrants are not tax-eaters in their younger years) them. Neglecting the trade-offs that will result in the future is sometimes referred to as “having your cake and eating it too”.

  • joe


    “Another way I’d love to help the world’s poor is to open U.S. borders to all immigrants.”

    I admire your desire to help everyone, but we couldn’t possibly help them all, could we? I cannot imagine the economic consequences of taking on all of the world’s poor, can you?

  • Joe, that’s too far off topic for comments on this post.

  • joe

    Good answer 🙂
    Perhaps another day?

  • Buzzcut

    No good replies to expanding the death tax to all estates?

  • Shelly

    For those of you who think illegals do not have access to medicaid/medicare. Our government set
    aside one billion dollars in 2005 for the treatment of illegals to be split among the border states for the care of illegals medical bills. I believe that I read in the recent past that more money has been taken out of medicare for the same reason. You can find this information on under medicare and illegal immigration. You will also find other cost listed there. As for the young lady who questioned medicare costs, I for one have paid for medicare for most of my working life in addition to state, local and federal taxes. One of the sadest days of my life was when I was told that I would no longer have medical insurance from my employer and had to sign up for medicare. This is the worst medical insurance I have had in my lifetime and as I said I have paid into this for most of my working life and it currently cost me
    $96.00 a month. So when out government sees fit to take funds from the medicare fund for illegals while they cut my benefits and increase my premium this does not bode will with me.

  • joe blanco

    see gov. etc stats.
    70% of M ‘care, M’ caid are spend on ‘last circa six months’ and legacy problems
    like care for people who smoked cigarettes.