This baby isn’t Babar

In this election year, no one is discussing the elephant-in-the-room problem that is devouring an ever-larger share of the nation’s federal budget — Medicare. Medicare spending swallowed $367.5 billion, or 13%, of the federal budget in 2007, and it is expected to grow by 6.5% a year for the foreseeable future.

This year, Medicare spending will exceed the program’s inflows, which come from a tax of 1.45% on taxpayer income. And, just 10 years from now, in 2018, the Medicare Trust Fund is expected to run out of money.

The current unfunded Medicare obligation is estimated at $71 trillion.

Despite the looming catastrophe, Congress averts its eyes from the monster gobbling up more and more federal resources, as do the presidential candidates of both parties.

The Medicare program is slipping into the red even before the great bulk of the baby boomers begin to retire. The first baby boomers reach eligibility for Medicare in 2011, and the numbers swell every year thereafter. By 2030, the number of Americans over 65 will grow to 73 million, from 40 million today.

If the program is not soon changed drastically, today’s younger workers will have to foot the bill in the form of an enormous tax increase and they won’t be happy.

A great deal of time, preparation and negotiation will be necessary to prepare the public for the painful choices that must be made if Medicare is to survive.

In the short term, taxes will have to be raised. In the longer term, a combination of Medicare benefit cuts and tax increases, and perhaps other spending reductions, will be needed to preserve the system for retirees.

At present, the government is attempting to cut costs to keep the system going by cutting reimbursements for doctors and hospitals. The result is that more and more doctors are refusing to treat new Medicare patients, and hospitals continue to try to pass more and more of their costs on to private insurers. This is not a viable long-term strategy, or even a short-term strategy.

At the very least, President Bush, or Congress, should establish a bipartisan commission to consider changes in Medicare to preserve it.

A new bipartisan commission focused solely on Medicare could prepare the way for significant changes. It might also serve to educate boomers about Medicare. As reported in last week’s issue of InvestmentNews, most baby boomers are largely unfamiliar with Medicare’s benefits, and what they cost.

Medicare Part B premiums can be as high as $405 a month per beneficiary, there is a $1,024 deductible for the first 60 days of hospital care, and co-pays can rise to as much as $512 a day after 90 days of treatment.

It’s time to educate workers and retirees about Medicare, its benefits and its total costs, and it’s time for the president and members of Congress to honestly discuss the size and shape of the elephant in the room, and the damage it could cause if it is not soon harnessed.