The untouchable entitlement

Hey, I haven't had a Social Security post in a long time. One reason I focus on Social Security, aside from the generational inequity it represents, is that at least the Social Security program has achievable - if painful - solutions. But Medicare is the program that simultaneously cannot be cut (due to the power of the elderly voting bloc) but cannot be paid for (due to runaway medical costs). The Weekly Standard frames the problem in: "The Train Wreck Ahead - Medicare is rolling toward disaster, and there is no easy way to fix it."

Social Security reform plans are a dime a dozen, but credible Medicare reform proposals are scarce. Why? Because Medicare's financial problems are so immense as to seem beyond resolution, and the policy environment is complex. Would-be entitlement reformers decry the lack of courageous leadership from politicians, but, truth be told, even the so-called experts are at a loss over how to begin closing Medicare's yawning financing gap.

The most recent report from the program's board of trustees, issued in late March, only adds to the sense of hopelessness. Medicare's liabilities are expected to exceed revenue dedicated to paying for the program by $36 trillion over the next 75 years, and the trust fund that pays for hospital services is expected to go bankrupt in 2019. Total Medicare spending is projected to more than triple as a share of the national economy, rising from 3.2 percent of GDP in 2007 to 6.3 percent in 2030, 8.4 percent in 2050, and 10.7 percent in 2080. Federal individual income tax collections amount to only about 8.5 percent of GDP. Covering just the increase in Medicare spending expected by 2030 would require a 36 percent across-the-board individual income tax hike.

Man, don't look at me. At least for Social Security, we can gradually increase the retirement age or pare cost-of-living adjustments. Medicare spending is nearly beyond control and an aging population will have little patience for program cuts. What this means is that, on top of Social Security shortfalls, younger workers will have to bear an ever-growing burden of spending on the elderly. A 36% tax hike (i.e. going from a 30% rate to 41%) on top of a 12.4% payroll tax edges into the twilight zone where people refuse to pay their taxes. As Herbert Stein sagely noted: "If something cannot go on forever, it will stop."