Rescuing Medicare

Although Social Security has achieved a delicate financial balance over the long term, Medicare is headed for financial trouble in the near future. Current projections indicate that the Hospital Insurance trust fund of Medicare will be exhausted in the early part of the next century; a weaker-than-expected economic performance would hasten the day of reckoning, as would health-care costs that grow more rapidly than anticipated. (See Figure 5.1 for a graphic depiction of the difference between the Medicare and Social Security situations.) The Hospital Insurance trust fund that covers Part A, or the hospital part, of Medicare will gradually build a somewhat large balance in the next several years, and then quickly become exhausted about fifteen years from now. By contrast, the oasdi fund will accumulate huge positive balances that dwarf the size of the very temporary positive balances in the Medicare fund.

The Medicare health insurance system, a vital source of protection for tens of millions of older Americans, must be kept solvent. In 1989 legislation enacted by Congress will add to Medicare by providing new protection against catastrophic acute-care expenses. The new coverage will be financed through a combination of monthly premium increases and a tax liability surcharge on senior citizens. This is a worthwhile improvement that will safeguard older Americans from some devastatingly large health bills. However, we should realize that the premium increases that are slated to finance this new coverage will do almost nothing to remedy the underlying financial imbalances in the existing Medicare system. And if those added premiums fail to keep pace with the cost of the new extra coverage, the imbalances will loom even larger.

It is important to note the difference between the financing sources that are used to pay for the new Medicare protection and the major financing source that we have proposed for meeting the cost of our commitments. The Medicare catastrophic illness protection will be paid for by a flat increase in premiums that all recipients will pay and a surcharge on the tax liability of senior citizens. Our major financing source is neither a premium nor an income tax surcharge; it is a policy decision that an important source of income that was previously exempt from taxation will now no longer be exempt. Thus, what we recommend is a broadening of the base of taxation, as opposed to an increase in the rate of taxation.