• Why health care needs fixing
    November 05,2013

    The implementation of Obamacare (officially known as the Patient Protection and Affordable Care Act — PPACA) is perhaps the hottest topic of political, economic and personal discussion in recent memory. Unfortunately the arguments, pro and con, often get mixed up in lots of irrelevant or misdirected topics. The most visible of these misdirections is the effort by the Republicans, in the House of Representatives, to hold federal funding hostage in order to defeat a Democratic program. Their real objection to Obamacare has very little to do with objections to the health care law — they simply do not want to allow the Democrats and the president to succeed politically.

    There also seems to be a general lack of understanding of the need for Obamacare. I remember just a few years ago when they were talking about how Medicare was going to bankrupt the nation or that millions of seniors would have no health care in their old age. For some reason, that I fail to understand, these old arguments are not being presented anymore, even though they are still valid and true. I’m going to present some of these facts here — not necessarily to support Obamacare, but to support the absolute necessity to do something to fix a system that is headed for a major train wreck.

    Let’s start with some basic facts that simply cannot be denied. Medicare is not a pre-paid plan in which a person’s contributions are used to pay for their future medical needs. It is a pay-as-you-go financing system. Today’s workers pay for today’s seniors. However, on average, seniors pay far less in payroll taxes than they receive in benefits. The average single male who retired at 65 in 2011, earned an average wage of $43,500 in 2011 dollars. This person would have paid about $60,000 in Medicare taxes but statistically he will receive $170,000 in benefits — or about $110,000 more than he paid in. A one-earner couple, retired in 2011 with an average wage would have paid $60,000 in Medicare taxes but would receive total benefits worth $357,000 — a difference of $297,000.

    So how does the system survive? The payroll deductions of those that have not retired yet (called workers) are paying for those that have retired (called beneficiaries). It takes payments into Medicare by 2.5 workers over their working lifetime to cover the costs of one beneficiary. This has worked well for 75 years but soon it won’t.

    There are roughly 77 million baby boomers who are moving into their retirement years at a rate of 10,000 per day over the next 19 years. Enrollment in Medicare will grow from 50.7 million beneficiaries in 2012 to over 81 million beneficiaries in 2030 — a 60 percent increase.

    Unfortunately, in the early 1960s, the birth rate dropped precipitously, largely because of the introduction of the birth control pill. The result was the lowest birth rate in the 20th century and it has stayed low ever since. In 1966, there were 4.5 workers for every Medicare beneficiary. In 2012, the number had declined to 3.3 workers and the ratio is expected to decline further to 2.3 workers by 2030.

    This all means that just as the largest bubble of population in U.S. history gets ready to retire, the smallest quantity of workers is in the workforce paying into Medicare. Essentially, Congress has promised medical benefits to millions of retirees over the next 75 years but the source of the money to pay for a lot of those benefits is currently unfunded or not available from existing taxes and deductions and will have to be raised out of new taxes to pay for those promised benefits. The unfunded amount is $37 trillion.

    Without serious structural reform, there are only two choices for Congress and the president to fix this: (1) increase the payroll tax even more, which is being started by the PPACA or (2) cut tens of billions of dollars for seniors’ Part A benefits and services, which is also being started by the PPACA.

    The problem, of course, is that to collect an additional $37 trillion in payroll taxes with a drastically decreased worker population, the taxes needed would be larger than anyone can afford. The PPACA includes a modest increase in taxes for people making $200,000 or more but that won’t be nearly enough.

    If benefits were cut enough to equal $37 trillion, it would mean millions of seniors would not receive needed medical services through Medicare and they would have to pay private insurers very high rates to get coverage. Benefit cutting also is partially implemented by PPACA but again, not nearly enough.

    This dilemma is why, way back in 1999, the honorable David Walker, former Comptroller General of the United States, told the Senate Finance committee, “The current Medicare program is both economically and fiscally unsustainable.“ The Medicare trustees and the Medicare Office of the Actuary have given a similar warning every year since then.

    These are the bare facts of the primary driving force behind the PPACA. The bitter truth is that the PPACA will not actually resolve any of the problems with Medicare but it will postpone the problem crisis by about 8 years to give us time to plan and pass a serious structural reform. Obamacare is not the solution but it is a step in the right direction.

    Tom Watkins lives in Montpelier. You can write to him at TomW@21VT.US.

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