Smart Bombs: Medicare truly is sick

Social Security and Medicare are often lumped together as budget items that are deemed unsustainable and therefore in need of major overhauls. While they’re both programs for retirees, that’s where their budgetary similarities end.

Both programs are highly valued. A recent Associated Press-GfK poll revealed that 72 percent of Americans see Medicare as “extremely” or “very important” to their financial security in retirement and 70 percent feel that way about Social Security. This makes sense when health care costs are so high and private investment accounts have dwindled.

A common belief of current and prospective beneficiaries of these programs is that they are entitled to them because they’ve paid for them. This is often true with Social Security but clearly false with Medicare. If you doubt this, read the analysis performed by the nonpartisan Urban Institute, which calculated the payroll taxes paid and the benefits received for American workers.

Before getting into that, it should be clear that nobody is entitled to the prescription drug program for seniors that began in 2006. Why? Because unlike the payroll tax for Social Security and Medicare, Congress failed to establish a funding mechanism for Medicare Part D.

As for the rest of Medicare and Social Security, the Urban Institute came up with some revealing numbers for various people who work continuously from ages 22 to 65. To counter the point that taxes paid could’ve been saved and earned interest, the think tank added 2 percent to the total above inflation. On the benefits side, average life spans and payouts were used. All amounts are in 2010 dollars.

Here are two examples:

• A dual-income couple each earning an average wage ($43,100) and retiring in 2010 would pay $581,000 in lifetime Social Security taxes and collect $539,000. Are they entitled? Yes, and then some. However, they would pay lifetime Medicare taxes of $109,000 and get $343,000 in benefits.

• A dual-income couple with one spouse earning $68,900 and the other $43,100 would pay $741,000 in lifetime Social Security taxes and receive $645,000 in benefits. As for Medicare, they would pay $140,000 and get $343,000 in benefits.

Up and down the income scale, the story is similar for those retiring in 2010. You pretty much break even with Social Security, but you get triple your “investment” with Medicare.

So what do these calculations mean? First, many workers who retire today have paid for their Social Security benefits. Medicare, on the other hand, is more of a welfare program, albeit a good one – about half of senior citizens had no hospital insurance and one-third of them lived in poverty before government rode to the rescue in 1965. Most of us reach old age, so at various times in our lives we are donors and recipients to the cause. Plus, private insurers aren’t much interested in us when we get old, because we tend to need more health care. Some people even have those dreaded “pre-existing conditions.”

Second, the financing difference between Medicare and Social Security is important when it comes to balancing the federal budget. Social Security’s troubles stem from taking the surplus amounts raised via the payroll tax and spending it on other government functions. On the other hand, Medicare is unsustainable because the financing has never kept pace with payouts, and escalating health care costs are exacerbating this disparity. To illustrate this point, take the average couple in the first example above and change their retirement date to 2030. They would pay $167,000 in lifetime Medicare taxes in exchange for $530,000 in benefits.

We cannot afford this. The key to controlling the Medicare budget is to control overall health care costs. Outcomes need to be measured. Savings need to be rewarded. Patients cannot have it all regardless of cost. According to the Dartmouth Health Atlas, about one-third of Medicare spending is wasted because this isn’t done. Private insurers could then capitalize on these efforts to complete the task of establishing a more cost-efficient health care system.

Medicare is the largest hurdle to balancing the budget, yet a majority of respondents from that same Associated Press-GfK poll say the nation can solve its budget crisis without touching it. Sorry, but that doesn’t add up.

However, by merely shifting costs from government ledgers to private ones (e.g., the Ryan Plan), the nation would miss a golden opportunity to rein in costs overall.