The Real Tax Gap: Paying for Unfunded Benefits

The Health Care Reform Bill is the largest Medicare cut ever. But it’s not enough

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The Fiscal Times
August 20, 2010

The 2010 annual report of Medicare’s trustees was released on Aug. 5. It shows that the Affordable Health Care Act, which was opposed by every Republican, will substantially reduce long-term spending. In a related report, Medicare’s actuaries make clear that Republican plans to effectively abolish Medicare are utopian in the extreme.

It’s worth starting with Medicare’s 2009 annual report. If one goes to page 69, it shows that last year Medicare’s actuaries were estimating a long-run deficit of $36 trillion in just Part A, which pays for hospitalization. This is equivalent to 2.8 percent of the gross domestic product in perpetuity.

On page 112 of the report, it shows that Medicare Part B, which pays for doctor’s visits, had a long run deficit of $37 trillion or 2.8 percent of GDP; that is, the amount of the program’s costs covered by general revenues over and above premiums paid by participants, which are capped by law at 25 percent of the program’s costs. (Originally, they were set at 50 percent.)

Finally, on page 127 there is data for Medicare Part D, which pays for prescription drugs. This program was rammed into law by George W. Bush and a Republican Congress in 2003 despite the large deficits that were already projected for Parts A and B. The Republicans provided no dedicated funding for Part D and its long-term deficit was estimated at $15.5 trillion last year, or 1.2 percent of GDP.

To sum up, Medicare’s 2009 report showed that taxpayers were on the hook to the tune of 6.8 percent of GDP. That is how much taxes would have to rise to pay all of the benefits that had been promised at that point. To put this number in perspective, federal income taxes are expected to equal about 10 percent of GDP over the long term, according to the Congressional Budget Office. Thus taxpayers were looking at a 68 percent increase in federal income taxes just to pay the unfunded costs of Medicare.

The 2009 report of Social Security’s trustees (p. 64) showed a long-term actuarial deficit in that program of $15 trillion or 1.2 percent of GDP. If one adds up all of these unfunded entitlement program promises, it came to 8 percent of GDP, which would have required an 80 percent increase in federal income taxes to fully fund.

The Difference a Year Makes
Now we turn to Medicare’s 2010 report. It shows enormous improvement in the program’s long-term costs as a result of the Affordable Health Care Act. Starting with Part A, we see that Medicare’s actuaries are projecting no long-term deficit whatsoever. Last year’s projected deficit of $36 trillion has literally fallen to zero (p. 85). Part B’s finances also show significant improvement, with the long-term deficit falling from $37 trillion to just $12.9 trillion or 1.5 percent of GDP. Medicare Part D’s finances are unchanged. The long-term deficit is estimated to be $15.8 trillion or 1.1 percent of GDP.

Putting these numbers together, we see that Medicare’s unfunded liability fell from almost $90 trillion in 2009 to less than $30 trillion, a two-thirds improvement in one year. As a percent of GDP, the taxpayers’ obligation has fallen from 6.8 percent to 2.6 percent. Throw in Social Security’s unfunded liability, estimated by its actuaries (p. 65) this year at $16.1 trillion, or 1.2 percent of GDP in perpetuity, we see that the potential tax increase from entitlement programs has fallen in half, from 8 percent of GDP to 3.8 percent. That still means a possible income tax increase of 38 percent, but that’s a lot better than 80 percent.

Although the trustees report represents the official projection for Medicare, its actuaries simultaneously published an unusual dissent suggesting a more likely alternate scenario than the one endorsed by the trustees.

Bruce Bartlett’s columns focus on the intersection of politics and economics. The author of seven books, he worked in government for many years and was senior policy analyst in the Reagan White House.