Gary North

Oct. 29, 2009

What does it cost the U.S. Government to pay for the Medicare enrollee who takes the full package of below-cost services?

Go on. Take a wild guess.

For the answer, check the table: lower right-hand corner.

The baby boomers (born 1946-58) turn 65 in 2011. Watch the Medicare rolls grow!

You think the U.S. government won't go bust if this program is not cut back?

In 2007, income from the Medicare payroll tax was less than expenditures for the HI program: hospital insurance. The Trustees reported this in 2008:

This year the HI Trust Fund will spend more than its income, and from 2009 through 2017, about $342 billion will need to be transferred from the Federal treasury to cover beneficiaries' hospital insurance costs.

This means that Medicare had to sell Trust Fund assets. What are these assets? IOUs from the Treasury. They are not assets. They are liabilities of the Treasury. The Treasury must then get the money to cover the red ink: from the general fund. But for 2010, the government is expected to run a $1 trillion deficit. This will continue until 2019, official estimates indicate: $900 billion a year, minimum. The Treasury must sell debt in order to pay for the HI costs.

So, there is no Trust Fund. It's an accounting trick. But the Trust Fund's representatives do not mention this. On page 67, we read:

The cumulative present value trends steadily downward over the projection period, reflecting the anticipated shortfall of tax revenues, relative to expenditures, in 2009 and later. The trust fund is projected to become exhausted in 2017, at which time cumulative expenditures would have exceeded cumulative tax revenues by enough to equal the initial fund assets accumulated with interest. The continuing downward slope in the line thereafter further illustrates the unsustainable difference between the HI expenditures promised under current law and the financing currently scheduled to support these expenditures.

Note the phrase, "unsustainable difference." Translation: red ink.

How big is the present discounted value of the total projected Medicare deficit, i.e., the money the government would have to raise today to cover presently unfunded liabilities? Over $13 trillion. That is the equivalent of the entire U.S. GDP. It is larger than the total of the admitted on-budget debt.

As noted previously, over the full 75-year period, the fund has a projected present value unfunded obligation of $13.4 trillion. This unfunded obligation indicates that if $13.4 trillion were added to the trust fund at the beginning of 2009, the program could meet the projected cost of current-law expenditures over the next 75 years. More realistically, additional annual revenues and/or reductions in expenditures, with a present value totaling $13.4 trillion, would be required to reach financial balance.

This assumes that the $13 trillion were then invested in non-government assets that would continue to appreciate at 5% per annum or thereabouts. What might those assets be?

Medicare is going bust. To avoid hyperinflation, the FED will have to cut off the Treasury at some point. The obvious budget to cut is Medicare. The obvious tax to hike is Medicare.

No one age 65 can buy health insurance. The companies toss you off the program. You have no choice. You sign up with Medicare. Once you are 65, you are trapped. If Medicare cuts payments, you or your physician must make up the shortfall. Probably you both will.

The clock is ticking. Meanwhile, Congress plays kick the can.

There is going to be rationing at some point. The system's costs have to be reigned in. Rationing is more acceptable politically than outright default. The problem is, this rationing process will affect health care delivery for non-Medicare patients. It is illegal to charge more to Medicare patients than is charged for the non-Medicare patient. If Medicare patients fill up your doctor's office, you will wait in line. Or you will have to find a doctor who charges high prices and who does not accept Medicare patients.

This means that your best strategy is to avoid getting sick.