Preserving Medicare for Baby Boomers Likely Means New Revenues

Bipartisan Panel Says Surplus Alone Won’t Save Medicare

For Immediate Release: September 26, 2000
Contact: Jill Braunstein at (202) 452-8097

WASHINGTON, DC — Using the federal budget surplus to fill the projected gap in Medicare’s finances is not a substitute for needing new revenues, according to a report released by the National Academy of Social Insurance. In fact, a bipartisan panel of experts assembled by NASI to analyze Medicare’s future concludes that Medicare will require substantially more revenues over the coming decades than previously envisioned.

“While a robust economy and new cost containment measures have substantially improved Medicare’s financial outlook, Medicare will still require significant additional revenues if we are to offer Baby Boomers the type of coverage enjoyed by current beneficiaries,” said Marilyn Moon, chair of NASI’s study panel on Medicare’s long term financing and a senior fellow at The Urban Institute.

The NASI panel analyzed various options for financing health services for Medicare beneficiaries over the next three decades. Its report shows that Medicare will require more than twice as much – or an increase of 111 percent – in taxpayer revenues in 2030 as it needed in 1998 to finance the same benefits.

“Continued growth in the economy, more efficient use of health care and new contributions from beneficiaries are not likely to be enough,” said panel member Sheila Burke, longtime policy advisor to former Senate Majority Leader Bob Dole (R-Kan.).

The report states that even with savings through efficiencies such as those presented in the Breaux/Thomas proposal to the 1999 Bipartisan Commission on the Future of Medicare, the program would still require 86 percent more taxpayer contributions in 2030 than it needed in 1998. Expansions in Medicare to cover pharmaceuticals, limit beneficiaries’ out-of-pocket expenses or allow people younger than 65 to participate would further add to the program’s financing needs. The NASI report states that adding a drug benefit with a $200 deductible, 20 percent coinsurance and $2,000 limit on out-of-pocket expenses, for example, would require 171 percent more revenues for Medicare in 2030 than in 1998.

The report also points out that using a federal budget surplus to fund Medicare’s future and pay for expansions is not as simple as it sounds, and would still require additional revenues. Although the concept is seen by some as a way to fund some of Medicare’s future needs in advance, others say it is merely an accounting change that will not help pay for additional Medicare spending in the future because the money is not actually held in reserves.

“When a surplus is earmarked for a government program, it’s like giving the program a ‘promise to pay’ from the rest of the government, redeemable at some future date,” said Moon. “But in a decade, when Medicare’s costs begin to exceed annual receipts and Medicare turns to its surplus, the government will either have to raise taxes, cut spending or issue new debt to the public in order to redeem Medicare’s securities. The panel agreed, however, that paying down the federal debt would improve the overall economy and make future changes less onerous.”

Despite the need for additional resources, the NASI report says Medicare’s financing woes are solvable. The report says projected gaps in financing the current program could be met by taking any one of the following steps now:

• Raising the payroll tax that currently finances Part A of Medicare from 2.9 percent to 4.84 percent. The payroll tax of a worker with an income of $35,000, for example, would go from $508 to $847 per year; the employer’s tax would rise by the same amount.
• Adding an 8.43 percent surcharge on income taxes already raised. For a family with income of $34,900 (just below the national median) with an average income tax liability in 1999, those taxes would rise from $1,710 to $1,852.
• Establishing a 2.02 percent tax on all goods and services purchased except housing costs, financial services, and some labor. A family with $25,000 in taxable expenses would pay $505. If the tax base were narrowed to exclude food, medical care, new housing and a few other items, a tax rate of 3.29 percent on remaining consumption would close the projected gap. A family with $15,000 in taxable expenses would pay $494.

According to the report, other options, such as increasing federal excise taxes, taxing the Medicare benefits of upper-income beneficiaries, and taxing the value of employer-provided health insurance, could also help meet Medicare’s financing needs.

“Whatever is done to secure Medicare’s future, starting early is important,” said Michael Gluck, co-author of the report and scholar-in-residence at NASI. “Policymakers need to begin the process as soon as possible. That would make the burden faced by families in any given year smaller than if we wait until the revenue needs are close at hand.”

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The National Academy of Social Insurance is a nonprofit, nonpartisan organization made up of the nation’s leading experts on Medicare, Social Security, and other social insurance programs. “Financing Medicare’s Future” is the final product from an expert study panel convened as part of NASI’s Restructuring Medicare for the Long Term project. The Robert Wood Johnson Foundation provided grant support for the project. The panel is composed of 12 recognized experts with diverse philosophical and professional backgrounds.