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Paying for Medicare: An Economic Look at the Program's Unfunded Liabilities
Tracy L. Foertsch, Ph.D., Joseph R. Antos, Ph.D., Heritage Foundation, 10-11-05

America’s entitlement programs—Social Security, Medicare and Medicaid—are in fiscal crisis and are threatening the long-term health and competitiveness of the U.S. economy. Foertsch and Antos focus on what they call “the gravest fiscal crisis that America faces,” Medicare spending.

The 2005 Medicare trustees’ report estimates that providing promised Medicare benefits over just the next 10 years could require over $2.7 trillion in new tax revenues. Raising taxes by that amount would eliminate almost 816,000 jobs per year, on average, and shave an average of nearly $87 billion from the real (inflation-adjusted) gross domestic product (GDP) between 2006 and 2015. Even worse, the Medicare trustees project that providing promised Medicare benefits over the next 75 years would require $29.9 trillion in new tax revenues. Raising taxes to meet Medicare’s 75-year shortfall would cost an average of 2.3 million jobs and well over $190 billion in real GDP annually through 2015. …
Economist Laurence Kotlikoff estimates that U.S. payroll and income taxes would need to rise to almost 40 percent of wages to cover future retiree’s promised health and pension benefits. This would put the United States in the economic territory now occupied by continental Europe, whose countries have had far higher taxes on labor income for decades. Europe also provides a cautionary tale: its countries have experienced declines in employment rates, average hours worked, and GDP growth since the 1970s—outcomes that many economists, such as Nobel laureate Edward Prescott, attribute to higher taxes. Kotlikoff estimates that the result of raising taxes to fund promised old-age benefits would be a 25 percent drop in the U.S. standard of living by 2030.

It is imperative that U.S. policymakers rethink entitlement programs that flaunt market principles and inhibit consumers from investing in their own futures. Over time, these entitlements have morphed from safety nets for the poor into sinecures for the middle-class and wealthy that drain resources better spent elsewhere.

Generous, broad-based policies might have been justifiable when the U.S. was the world’s unchallenged economic superpower, senior citizens were largely poor, and medical technologies were relatively inexpensive. Now we face global competition, seniors are among the wealthiest Americans, medical technology is expensive, and Americans can readily expect to live long, productive lives for decades after retirement.

When it comes to Medicare, America desperately needs policies that reflect the economic and demographic calculus of this century, not the last one.

Project FDA.
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