The Future of Medicare
AEI Newsletter

Though it is becoming a commonplace of public policy discourse that the Medicare system is in perilous financial condition, the federal government has yet to adopt a strategy to avoid the impending bankruptcy of the program.

AEI held a conference on April 29 to examine possible solutions to the crisis and to discuss the political considerations involved in reforming Medicare. The event was organized by AEI's director of health policy studies, Robert B. Helms.

The keynote address was delivered by Sen. Phil Gramm (R-Tex.), who will propose a comprehensive reform of Medicare in legislation later this year. Sen. Gramm insisted that the problems of the Medicare system are even more severe than people realize. "Under the best of circumstances, Medicare in the next twenty years will probably be the largest financial crisis that has ever faced the American government. It is going to cost more to fix Medicare than it cost in real dollars to win World War II."

Sen. Gramm identified two problems underlying the program's troubles. First, per capita costs have risen so sharply for fifteen years that, even with relatively few new retirees in the system, the cost of Medicare has risen faster than that of any other federal program. Second, the program is actuarially unsound. The system pays for this benefit to retirees by taxing those currently in the work force. When Medicare started in 1965, there were nearly six workers for every retiree. That figure has slipped to 3.9 and is headed down to 2.2 workers per retiree.

Sen. Gramm's proposal will aim to curb the rise in per capita costs. It would redesign the standard Medicare benefit and introduce a set of competing plans for Medicare beneficiaries to choose from. Regarding the demographic issue, the Texas senator spoke in favor of shifting the basis of the program from intergenerational transfer payments to one based on individual annuities earmarked for health insurance in retirement.

The official actuarial projections for Medicare were discussed in a panel that included Stuart Butler of the Heritage Foundation, Robert Reischauer of the Brookings Institution, Thomas R. Saving of Texas A&M University, and C. Eugene Steuerle of the Urban Institute.

Both Mr. Reischauer and Mr. Steuerle cast doubt on the assumption in the official projections that per capita costs over the long term will tend to grow at approximately the rate of growth of personal income. Costs have been growing more rapidly than income for several years, and it is not clear why this trend would not continue. As Mr. Reischauer put it, "This creates a misleading impression as we move toward 2010 that the problem is manageable. It appears manageable only because an assumption has been made that it will be managed."

A panel of political analysts addressed the short-term political outlook for Medicare reform. AEI Resident Fellow Karlyn Bowman moderated the discussion, which included remarks by Resident Scholar Norman J. Ornstein, political commentator Stuart Rothenberg, and pollsters Bill McInturff and Jennifer Sosin.

Each of the panelists emphasized the importance of how the issue is defined and agreed that the public is hostile to the idea of cutting the program to balance the budget or to pay for tax cuts but amenable to changes presented in the context of preserving or protecting it. Mr. McInturff, however, said that serious reform is unlikely in the foreseeable future precisely because the terms of debate have already been settled: organized labor succeeded in the 1996 election cycle in convincing voters that Republicans wanted to cut the program. Mr. Ornstein argued that "the Republicans dug their own grave on this issue" by defining it in the context of balancing the budget and by proposing tax cuts worth approximately the same amount as the cost reductions they sought in Medicare and Medicaid.

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