Medicare for Beginners

Wednesday 13 April 2011
by: James Kwak, The Baseline Scenario

This isn’t a post explaining how Medicare works in detail. It’s a post about why Medicare matters to you.

The basic "problem" with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The "solution" proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I've described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle.

We created Medicare in the 1960s because retired people did not have another viable way of getting affordable health insurance. Medicare forces workers to pay for retirees' health insurance, but since workers become retirees someday, it's in their own interests to do so, assuming the system remains in place.

Forty-five years later, the same factor that is creating the projected Medicare deficit — health care inflation — is also making it even harder for non-working people to get affordable health insurance. On its face, this should make it even more important to preserve the basic structure of Medicare, even if it requires a higher payroll tax: you pay now, but in return you get decent health insurance later. But instead of being concerned with ordinary people — the workers who will need Medicare when they retire — the political class is concerned with the abstraction called the government deficit. Hence its overriding concern is providing cost certainty to the government, even if it means eliminating Medicare's most important feature — guaranteed insurance.** In addition, the political class seems to think that cutting spending is always better than increasing taxes — even though, to some extent, the two are equivalent.

(More here.)

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