MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Achieving Generational Balance Via Medicare Cuts 2

The table shows the requisite permanent percentage cut in Medicare benefits needed to achieve generational balance given the policy in place and the start date for the cut. It also shows the absolute Medicare spending cut in billions of 1995 dollars in the first year the policy is initiated. Finally, the table shows the common lifetime net tax rate that will face future and newborn generations once the specified policy is enacted.

Under baseline policy, the U.S. can achieve generational balance by either a) permanently cutting Medicare by 68 percent starting right now, b) waiting five years and permanently cutting Medicare by 78 percent, or c) waiting until 2016 and finding out that even the total elimination of the program is insufficient to produce generational balance. The simple arithmetic of generational accounting makes time a grim reaper. The longer the government waits to administer its painful medicine, the more cohorts who escape having to take that medicine, and the more medicine that needs to be taken by those cohorts who are left behind. itat on

In terms of its impact on the conventional budget deficit, achieving generational balance via an immediate and permanent cut in Medicare would entail running close to a $250 billion surplus this year and for many years into the future. This is vast sum compared to the current official $8 billion surplus that our politicians are a) holding up as a sign of prudent fiscal management and b) contemplating spending.

Restraining government purchases is one of many ways of limiting requisite Medicare cuts. But even if real federal purchases were held absolutely fixed after 2000, an immediate and permanent 53 percent cut in Medicare spending would still be needed to achieve generational balance. This is a remarkable finding. Holding federal purchases fixed in real terms as the economy continues to grow means that the federal government is asymptotically eliminated. But even the eventual effective elimination of general federal government appears to be far too little too late to rescue the next generation. Another way to try to avoid immediate Medicare cuts is simply to slow the growth of its expenditures as well as those of Medicaid. The third column of Table 4 contemplates such a policy. Unfortunately, slowing down health care spending through 2003 and allowing Medicare and Medicaid benefits per beneficiary to grow no faster than the rate of labor productivity growth also falls far short of what is needed for generational equity. Even with such a slow-growth policy, the initial level of Medicare would need to be reduced by almost one third. Indeed, an immediate and permanent 11 percent cut in Medicare benefits is needed even if a) the federal government is allowed to slowly dematerialize and b) the growth of health care spending is finally brought under control.