Cutting Medicare Benefits to Achieve Generational Balance

Although the imbalance in U.S. generational policy is quite large, it is substantially smaller than it was a couple of years ago. The improvement in the U.S. generational imbalance can be traced to changes in policy that have led to revised fiscal projections and changes in the fiscal projections of the same policies.

Medicare is a prime example. Since 1995, Medicare has been subject to significant legislative changes. A number of the assumptions underlying its projected expenditures have also been reassessed by HCFA – the Heath Care Financing Agency. Chart 1 presents past and projected future Medicare outlays as a percent of GDP. For years after 1995, the chart shows the Medicare-GDP ratio as projected in 1995 (labeled Pr 1995) and the ratio projected in 1997 (labeled Pr 1997). There is a tremendous difference in these two projections, culminating in a more than 5 percentage-point difference in the long-run ratio of Medicare to GDP. Note that current Medicare expenditures are now roughly 2.5 percent of U.S. GDP, so the revision in the government’s long-run forecast of the size of this program amounts to the equivalent of two expenditure programs that are each as large, relative to the U.S. economy, as the current Medicare program! More info

Chart П repeats Chart I, but also shows the revisions between 1995 and 1997 in projections of different taxes, transfer programs, and government purchases relative to GDP. Although the revisions in Medicare projections are the most dramatic, the 1997 projections also incorporate much lower projected future OASDI expenditures and government purchases. They also incorporate significantly lower projected future government labor income and payroll tax receipts. In the case of labor income taxes, there is over a 3 percentage-point difference in the long-run projected ratio of these receipts to GDP.

The lower long-run Medicare projections appear, in large part, to be inspired by success in the past couple of years in maintaining the level of Medicare expenditures relative to GDP. Part of this success stems from shifting a portion of the Medicare population into health maintenance organizations and other managed care programs. Whether or not the improvements in the projections of long-run Medicare expenditures are justified, it’s clear that there is a great deal of uncertainty about future Medicare expenditures and that future generations can ill afford any long-term forecasting mistakes on the part of current policy makers. Given how much the government has changed its long-term Medicare forecast in just the past two years, one could argue that the government should err on the conservative side in using Medicare forecasts to help assess the imbalance in U.S. generational policy.