June 24, 2024

Economic Scene: Generational Divide Colors Debate Over Medicare’s Future

Yet there is at least one big way in which the plan isn’t daring at all. It asks for a whole lot of sacrifice from everyone under the age of 55 and little from everyone 55 and over. Representative Paul Ryan, the Wisconsin Republican who wrote the plan, calls the budget deficit an “existential threat” to the United States. Then he absolves more than one-third of all adults from responsibility in dealing with that threat.

This decision doesn’t make him unique in Washington. There is nearly a bipartisan consensus that any cuts to Medicare and Social Security should spare the baby boomers and the elderly. And, certainly, retirees or people on the verge of retirement shouldn’t have their benefits changed radically. But the consensus, like Mr. Ryan’s plan, goes too far.

The reason is partly political. Older people vote in larger numbers than younger adults. Children, of course, can’t vote at all. But beyond politics, Washington’s age bias depends on a basic misunderstanding of the budget — namely, that older people have already paid for their Medicare benefits.

They haven’t. For most Americans, Medicare resembles a giant welfare program. They receive far more in government benefits than they ever pay in taxes and premiums. The gap for a typical household runs to several hundreds of thousands of dollars.

The Ryan plan would let anyone who turns 65 before 2022 continue to be part of this hugely popular welfare program. In fact, Mr. Ryan would scrap the common-sense attempts to slow costs in last year’s health bill, like the baby steps to base Medicare coverage decisions more on medical evidence. If you’re 55 or older, you get the same old Medicare, with its same soaring budget.

If you’re under 55, you are excluded. You will instead receive a government subsidy to buy private insurance, and the subsidy will probably not keep pace with future increases in health costs.

Beside violating basic notions of fairness, the grandfather clause has the potential to slow economic growth. Many of today’s 55- and 60-year-olds are going to be on Medicare for a long time. If the program doesn’t change, they will run up trillions of dollars in medical bills. That money won’t be available for education, early child care, scientific research or high-tech infrastructure — all of which can lift growth.

The United States already has a “particularly strong age bias” in its government spending, Julia B. Isaacs of the Brookings Institution noted in a recent analysis of affluent countries’ budgets. In the years ahead, spending on the elderly has the potential to rise higher still and to crowd out spending on the young.

Eugene Steuerle, a former Treasury official in both Democratic and Republican administrations, says simply, “We have a budget for a declining nation.”

Mr. Steuerle — along with his Urban Institute colleague Stephanie Rennane — has done some of the most careful work comparing Medicare taxes and benefits. They added up all the taxes people at different points on the income spectrum would pay over their working lives and then translated these amounts into a single sum, expressed in today’s dollars. Mr. Steuerle and Ms. Rennane likewise added up the value of Medicare benefits (net of premiums) that men and women could expect to receive.

Their results show that no cohort of Americans, with the possible exception of the very affluent, pays enough Medicare taxes and premiums to cover their costs. The gap is growing over time, too.

Two married 66-year-olds with roughly average earnings over their lives will end up paying about $110,000 in dedicated Medicare taxes through the payroll tax, including the portion their employers pay. They can expect to receive about $340,000 in benefits. Two average-earning 56-year-olds will pay about $140,000 and get back about $430,000 in benefits.

Why? By law, Medicare taxes cover mainly hospital bills, not doctors’ bills or the cost of drugs. These costs instead must be covered by the general government revenue, but there isn’t enough of that revenue. Instead, the government is running deficits — which is to say, it’s borrowing money from individuals and foreign governments and promising that future taxpayers will pay it back.

Who are these future taxpayers who will kindly cover Medicare’s shortfall? The same ones who, under the Ryan plan, won’t have Medicare for themselves.

A fairer, more fiscally conservative plan would not postpone dealing with Medicare. It would leave in place the cost control measures in the health reform bill and go even further to reward the quality of care rather than the volume. Obviously, these steps would run some risk of restricting good treatments, too. But, remember, we’re facing “an existential threat.” We can’t limit ourselves to solutions without risks.

Next, the federal government would raise taxes. As countries have grown richer over time, they have historically paid higher taxes — to cover the costs of a strong military, good schools, comfortable retirements and other luxuries that the free market doesn’t provide.

Affluent Americans, in particular, can afford higher taxes. They have received far larger raises in recent decades than any other income group, and their tax rates have fallen far more. Yet Mr. Ryan would reduce them further.

Some health economists believe that a combination of higher taxes and more Medicare cost controls can solve the problem. Mr. Ryan does not. And his skepticism is healthy.

To him, the only way to reduce Medicare’s cost growth is to stop shielding people from the consequences of their decisions. If they want almost limitless medical treatments, they won’t be able to foist the bill on taxpayers, as they do now. They will instead have to buy a generous insurance plan, partly with their own money. The resulting market forces, Mr. Ryan argues, will eventually bring down costs and leave most people better off.

He may well be right that a solution along these lines is ultimately where health care needs to go. But it would be a lot easier to trust in the merits of his plan if he weren’t so busy promising 75 million Americans that they will never have to be a part of it.

E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

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