In early May, President Bush announced a new commission to solve the funding shortfall expected to hit Social Security in coming decades. The topic has obsessed Republicans and Democrats alike for years as the largest long-term budget problem facing America.
Except that it's not. In just 13 years, the federal government will be spending as much on health care--mostly for the elderly--as on Social Security. The problem will get worse after that, when the first big wave of baby boomer retirements hits. It won't be long before providing health care dwarfs the cost of Social Security, according to new studies by three government agencies, the General Accounting Office, the Congressional Budget Office, and the Medicare trustees (chart).
The bulk of the cash will go to Medicare, which targets seniors. The rest will fund Medicaid, a program originally designed to care for poor children that now pays nearly half the nation's nursing-home costs. The bill will jump by tens of billions of dollars a year more if Congress adds a promised prescription drug benefit to Medicare.
Regrettably, the agencies' staggering conclusions are falling on deaf ears. Instead, Congress and President Bush are talking about a $1 trillion-plus tax cut, based on visions of massive budget surpluses over the next decade. Yet soaring Medicare and Medicaid expenses are likely to wipe out the entire surplus within the next 15 years or so, according to both the GAO and the CBO.
BIG SQUEEZE. The price of ignoring the problem will be painfully high. Unless ways can be found to rein in costs or limit benefits, lawmakers will have to slash spending on other programs and pass tax hikes much larger than any cuts they agree to this year. "We have a strong probability of being in a mess," argues Jeff Lemieux, a health-care analyst at the Progressive Policy Institute, a Democratic think tank.
Washington has ignored this unpleasant issue largely because budget projections go out only 10 years, just before big Medicare and Medicaid cost hikes start to kick in. But when they do, the price tag will be enormous. Today, the federal government shells out about $350 billion, or 3.5% of gross domestic product, on health care. That will double in just two decades. Within 40 years, Washington will be spending 50% more on health care than on Social Security. By 2075, it will spend more than twice as much--a mind-numbing 14.5% of GDP. That's more than for any other initiative in modern U.S. history, except World War II.
This isn't just some problem for future generations to worry about. Medicaid costs are already squeezing states, which fund 40% of the program. Now, they spend a fifth of their budgets on it. Within a year or two, it could become their single biggest expenditure, higher than K-12 education. The reasons: exploding costs of drugs and nursing homes.
Of course, no one can project decades in advance with much confidence. But the actuaries make a plausible argument. The number of Americans over 65 will more than double by 2050 and nearly triple by 2075. At the same time, the amount of money spent per person is skyrocketing. In 1970, Medicare spent about $350 per beneficiary. In 2000, it spent $5,655. The cost will hit nearly $10,000 a person by 2010, according to the Medicare trustees. One primary cause: Advances in medical technology are making care more accessible. "When you make procedures cheaper and easier, more and more people use them," says former Medicare trustee Marilyn Moon.
The question, of course, is: Who will pay? The more government spends, the less it has for other priorities. If nothing is done, Medicare and Medicaid "will eat the rest of the budget," warns CBO Director Dan L. Crippen. The new studies offer no clues about how to resolve these conflicts. But they make it clear that Congress must come to grips with funding not just Social Security but also the health care that goes with it. By Howard Gleckman