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Making sense of Medicare projections

A weekly presentation of downloadable charts and short analyses designed to graphically illustrate important economic issues. Updated every Wednesday.

Snapshot for May 16, 2001.

Making sense of Medicare projections
In each of their annual reports issued in recent years, the trustees of the Medicare program have extended the years over which the program will be able to pay all the costs of beneficiaries’ health care. In the report issued this spring, the trustees projected full funding for the next 28 years, until 2029. (See Snapshot from last week.)

In their reports the trustees also estimate the amount by which the payroll tax, the main source of revenue for the Medicare trust fund, would need to increase to provide 75 years of full funding. Currently, both employers and employees pay 1.45% of earnings into the trust fund, or a total of 2.9%. This tax rate has remained unchanged since 1986 despite huge increases in the cost of health care. In their 1996 report issued five years ago, the trustees estimated the payroll tax would need to rise by a total of 4.52 percentage points, or from 2.9% to 7.42%, to ensure Medicare’s ability to pay all health costs for the next 75 years. But by last year, due to a slowing in the rate of growth in Medicare expenditures and improvements in the economy, the shortfall had fallen dramatically (by about three-quarters) from 4.52 percentage points to 1.21. (See chart below.)

This year, because Medicare’s future appeared even brighter, a further decline in the shortfall was expected. However, the trustees instead adjusted upward their estimates of future cost growth. In other words, they now assume that health care in the future will cost more than they estimated in years past. Consequently, the funding shortfall, expressed as the tax increase needed to pay for the next 75 years of Medicare, did not continue to fall as expected, but instead rose to 1.97 percentage points. Since we already have full funding through 2029, this money would be needed to pay the costs incurred in 2030 through 2075. If the trustees had not assumed a higher rate of future cost growth, the shortfall would have been 1.12 percentage points, not 1.97. Of course, given all of the fluctuating variables involved, the true rate of future cost growth is unknown.

Medicare is one of the most successful government programs in U.S. history. In addition to its popularity, Medicare has been a leader in containing costs while continuing to provide beneficiaries with access to high quality care. Medicare was designed to be, and for most of its existence has been, a pay-as-you-go program. In other words, most of the tax money received by Medicare in any year was spent that same year paying for beneficiaries’ health care. The notion that Medicare’s strength and continued existence rests upon the demonstration of a 75-year funding stream is quite recent. Nonetheless, even the trustees’ pessimistic projections show 28 years of full funding with no change in the tax rates. As health costs continue to rise and as the number of beneficiaries grows, more money will be needed, but fundamental restructuring of the program is not warranted.

Check out the Snapshot for May 9 for more about the Medicare trustees’ report.

This week’s Snapshot by EPI economist Edie Rasell.

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