Why Medicare as We Know It Can't Last

Which party will cut Social Security and Medicare?

Democrats and Republicans have spent much of this month pointing fingers at one another.

A new report from the Congressional Budget Office (CBO) suggests that both parties have cuts to old-age benefits on the docket.

According to the CBO, the Social Security Old-Age and Medicare Hospital Insurance trust funds will run out of cash in 2033, at which point they won't be able to pay all their bills.

In other words, failing to cut these programs voluntarily today will lead to involuntary cuts in the near future.

For Medicare, at least, there are a number of sensible strategies for bringing the program's costs under control without undermining access to care. But first, lawmakers need to grapple with reality — and acknowledge that there's a problem.

Medicare has been flirting with insolvency since just after its creation in 1965.

By 1970, Medicare's trustees were projecting that its Part A hospital insurance trust fund would only last another two years.

Since then, efforts to stave off fiscal doom have extended the entitlement's life. But they haven't addressed the root causes of the problem.

The first is Medicare's pay-as-you-go structure.

Medical bills for today's beneficiaries are paid for with taxes collected from current workers. But not enough people are aging into the workforce to support all those aging out of it.

Today, 17% of the country is 65 or older and thus qualifies for Medicare.

By 2030, the entitlement will cover more than one in five Americans, and by 2060, nearly a quarter of the country. The nation's birth rates, meanwhile, have been falling precipitously for years.

Medicare is also a universal entitlement — everyone is eligible for the program when they turn 65. Hospital insurance is available to all beneficiaries on equal terms, regardless of income or wealth.

The cost of coverage for physician services does increase with income. But most beneficiaries pay the lowest rate; premiums don't start climbing until an individual reaches $97,000 in annual income.

In other words, as more Americans age into the program, there's nothing to stop Medicare's financial obligations from growing at an explosive rate, even as revenues shrink.

And that is precisely what is happening now.

In 2023, CBO projects that Medicare outlays will rise 16% to $820 billion, in part "because of increases in enrollment (which is projected to rise by 2 percent), payment rates, and spending related to beneficiaries’ use of care."

Receipts, meanwhile, will decrease.

Like it or not, Medicare is running out of money.

Once it does, payments to hospitals and doctors will decline, jeopardizing access to care for millions. Doing nothing is tantamount to cutting the program.

A better alternative is to address the sources of Medicare's precarious fiscal situation -- and in a way that improves the quality of care seniors receive.

Lawmakers might start by means-testing the program, so wealthier seniors pay a little more for their care.

Those new revenues could be used to put the program on sounder financial footing.

If the federal government is going to subsidize health care for older citizens, it should prioritize those who genuinely need financial assistance.

Enabling seniors to contribute money to tax-advantaged health savings accounts is another step in the right direction.

These accounts enable people to set aside money tax-free for future healthcare expenses.

HSAs trust people to spend their own money as they see fit.

So they're rewarded for shopping around for the best value.

The competition that HSAs engender can push providers to offer better care at lower cost.

Finally, raising the eligibility age for future Medicare beneficiaries could shore up the program's long-term fiscal health.

People who make it to 65 today can expect to live another 18.4 years, on average. In 1970, by contrast, life expectancy at 65 was 15.2 years. Medicare should reflect this reality.

Cutting Medicare will never be popular, which is why Democrats and Republicans alike do their best to obfuscate the issue. But cuts to Medicare and Social Security are coming.

Politicians in Washington need to level with Americans — and reform the programs so they're sustainable for future generations.

Sally C. Pipes is president, CEO, and the Thomas W. Smith fellow in healthcare policy at the Pacific Research Institute. Her latest book is "False Premise, False Promise: The Disastrous Reality of Medicare for All," (Encounter Books 2020). Follow her on Twitter @sallypipes. Read Sally Pipes' Reports — More Here.