MEDICARE FROM THE PERSPECTIVE OF GENERATIONAL ACCOUNTING: Introduction 2

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Some of the revisions in the government’s fiscal forecasts are quite remarkable. Take Medicare expenditures between 2030 and 2040. Compared with their 1995 projections, the Health Care Financing Administration (HCFA) is now projecting these expenditures to be 2 to 3 percentage points smaller. To put this revised projection in perspective, Medicare expenditures are now roughly 2.5 percent of GDP. Hence, the new HCFA forecast eliminates future Medicare expenditures in the 2030s, which, when measured relative to the size of the economy, are as large as the entire current Medicare program!

This paper considers the role of Medicare in contributing to the imbalance in U.S. generational policy. It also describes the recent revisions in long-term Medicare expenditure projections. And it considers the extent to which immediate or future cuts in Medicare benefits can be used to eliminate the outstanding imbalance in U.S. generational policy. The paper begins in the next section by reviewing the methodology of generational accounting. Section III presents baseline U.S. generational accounts. Section IV compares the imbalance in U.S. generational accounts with those in other developed countries. Section V describes the recent revision in projected Medicare expenditures and the ways one can restore balance to U.S. generational policy by cutting these expenditures. The final section, VI, draws conclusions. financial services