Medicare Losses Today and Tomorrow

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The single largest transfer payment that the government makes is to the Medicare program. For the calendar year of 2011, the Medicare premium and interest receipts were $306.7 billion, while the expenditures were $549.1 billion, requiring a draw on the general funds of the government of $242.4 billion. Here is the detail, broken down by the three Medicare plans.

Medicare Plans Part A Part B Part D Total
Income (billions) $228.9 $63.4 $14.8 $306.7
Expenditures ($256.7) ($225.3) ($67.1) ($549.1)
Net Loss ($28.3) ($161.9) ($52.3) ($242.4)


This gap exists with roughly three times as many workers contributing to the system as are receiving benefits. As the labor force migrates into retirement, this ratio is predicted to deteriorate to 2.5 by 2020 and 2.0 by 2035.

Furthermore, and consistent with the notion of Medicare as a transfer payment, C. Eugene Steuerle and Stephanie Rennane of the Urban Institute have found that most Americans will receive far more from Medicare than they put in. For example, they calculate that the average two-earner couple retiring in 2010 will have paid $116,000 in Medicare taxes and will receive $351,000 in lifetime benefits – triple their contributions.

On a per capita basis, someone who participates in all three plans currently pays $6,555 per year while the system pays out $12,212. Thus to close this gap, the combination of taxes and premiums would have to double. The payroll tax would have to increase from 2.9% to 3.3%. The monthly premiums on B would have to increase from $100 to $400. And people would have to start paying roughly $120 per month for their prescription benefit. It is pretty clear that this is never going to happen.

So what can be done? On the revenue side, an important step has already taken place as part of the Affordable Care Act, which raised the payroll tax by 0.9% on people making more than $200,000 ($250,000 for joint filers), and imposes a 2.9% tax on unearned income for these people. The Joint Committee on Taxation estimates that these measures will raise $184 billion over the next 10 years.

Thus, one of the more obvious steps has already taken place – raising the tax on high earners –  but as we can see from the table above, this won’t even cover one year’s deficit, much less 10 years of deficits. And assuming that there is no political appetite to raise taxes on middle and lower income earners, any future improvement is going to have to come on the expenditure side.

But the forecast for the future paints the opposite picture. Although the growth rate of medical health care spending has declined in the past several years, probably as a result of the decline of employment-based insurance due to the economic downturn in 2008, it is projected to resume its faster-than-the-economy growth rate. Over the next decade the Medicare Board of Trustees is forecasting a 6.2% growth in Medicare expenditures versus a 4.1% growth in the economy. (See Table V.B1. on page 203 in the link)

There is no escaping the reality that unless we find a way to reign in Medicare expenses, the amount of money that we spend on our elderly’s health care will continue to grow as a percent of the economy and as percent of government spending – a harbinger of what we face if and when we move to universal health care.

Frank Trainer, a Hastings Center Board member, oversees several distribution companies and is a member in Balancitta, LLC, an investment partnership. He was director of fixed income at Sanford C. Bernstein & Co.

4 Responses to “Medicare Losses Today and Tomorrow”

  1. John VanderZee

    Clearly, we have to reduce health care costs in order to preserve Medicare and reduce the deficit over time. The new Health Care Consent Act moves in that direction. You can further reduce costs by improving efficiency (Medicare for all!) and moving from a fee-for-service to an outcome-based model of reimbursement. In addition let’s raise taxes, especially on the rich, but even, if necessary, on the middle class. Over the years, poles have shown that the American people are willing to pay more taxes in order to improve access to health care and reduce unpredictable out-of-pocket costs. Furthermore, let’s reduce the amount spent on the last 6 months of life. Also increasing costs for preventive care and health education will reduce expenditure down the line. Critics complain about the percentage of medical costs compared to GDP. So what?! I can’t think of a better thing to spend our tax dollars on than the health and wellness of our citizens. If you’re going to cut, cut military spending and programs that don’t work. Medicare works!

    • Jhendie

      I am very disappointed in our Congress the very peolpe who’s main concern is to protect their constituents have failed the American peolpe by passing the heallth care bill without knowing what it actually contains. It is also irresponsible of them to lower medicare fees which are already to low ,it would nice however if the goverment would pay 21.3% of the Doctors overhead expenses.

  2. Jerry Bakker

    I believe it is clear that the administrative costs of Medicare done by the government is about half or less than when it is handled by private insurers. But there is competition there, doesn’t that make for savings. Not on your life.

    Other things mentioned — Leave Fee-for-Service — Cut all drug ads to about 1/10th of what is spent now.

  3. John Moore

    Your rhetorical points would be more convincing if you included arithmetic implied by them. $18 billion (averaged tax receipts) is not much of a patch on $242