By far, our largest unfunded liabilities are Social Security and Medicare. According to recent actuarial reports, Medicare faces a $25 trillion liability and Social Security has an unfunded liability of $21 trillion. And those numbers are regarded as low-ball figures, due to their unrealistic accounting for cost-cutting measures. They already represent the largest expenditures of the federal government, with Social Security and Medicare consuming 20.2% and 14.6% of the budget respectively. Those numbers are slated to skyrocket as the retirement population doubles over the next three decades. Hence, any meaningful discussion of balanced budgets must include a plan to fix these two entitlement behemoths – brought to you by previous Democrat presidents.
The first step to entitlement reform must include an acknowledgement of the dichotomy between the two largest programs. Social Security and Medicare are very different programs. Consequently, they face divergent problems and require dissimilar solutions.
Last week, healthcare expert Christopher Conover posted an analysis at the American Enterprise Institute, illustrating the differences between Social Security and Medicare. He found that while most people (except low-income earners) receive Social Security benefits that are roughly commensurate to their contributions from the 12.4% payroll tax, the same cannot be said of Medicare benefits. The average Medicare recipient, according to Conover, received $2-$6 per every dollar paid into the system via the 2.9% Medicare tax. Moreover, the only people who earn all of their Medicare benefits are those earning an average of $130,000 a year over their entire career – the very people who will see a payroll tax increase under Obamacare.
The two entitlement programs must be addressed with honest solutions, albeit with drastically different approaches. Social Security is very simple. It is not an entitlement program. With the exception of low-income earners, most people receive less than the aggregate contributions paid into the system, when the expectation for reasonable interest returns is factored in. Social Security is a mandatory Ponzi scheme that offers lousy returns, taxes some of those returns, and commandeers those returns from the estate of a deceased recipient.
Accordingly, people who decry attempts to cut Social Security by using the rallying cry, "it's my money," are absolutely correct. It is their money – and if they were given an opportunity to invest that money in private accounts, they would be able to retire comfortably and enjoy a better rate of return. Thus, a gradual move towards private accounts is the way to go.
Medicare, as Mr. Conover observes, is a very different challenge. Not only is Medicare, as it's currently constituted, a burgeoning budget-busting entitlement program, it is the most prominent market-distorter amongst the plethora of market distorting programs Democrats have injected into the healthcare system over the years. This open-ended third-party program has engendered a self-fulfilling cycle of unaffordability into the healthcare system. Its very existence has raised the cost of care to the point that very few people can afford to retire without it. To that end, unlike with Social Security benefits, Medicare recipients lack the ability to say (they say it anyway), "give me my money back, and I'll take care of my own healthcare."
The bottom line is that the aggregate savings from the 2.9% Medicare payroll tax and the premiums for retirees are insufficient to pay for today's healthcare costs – costs that were spiked by the counterintuitive nature of third-party open-ended payments. This is how liberals have distorted the costs of healthcare and created dependency over the past few decades. Whatever is left of free-market healthcare after Medicare, Medicaid, VA, SChip, and all the mandates on private insurance – will be decimated by Obamacare.
While the ultimate goal of any Medicare reform must be the same as Social security reform; less dependency and empowering individuals, we must first lower healthcare costs by fixing the entire system. The way to lower direct healthcare costs is through malpractice reform. The way to lower the cost of health insurance, and by extension, actual healthcare costs, is by reinstating the free market into the health insurance industry. That will necessitate reforms that help peg services and healthcare usage with actual costs.
Being that Medicare is the biggest driver of healthcare costs, it should be the biggest priority on the agenda of reformers. Medicare must be transformed from an unlimited third-party payer system to one that empowers the individual to buy his/her own insurance with the payroll tax funds that are commensurate to the cost of the plan. Either a direct voucher system or Paul Ryan's premium support plan would fit the bill.
Other reforms should include the following: expansion of tax free HSAs, removal of anti-free market mandates and one-size-fits-all mandates on insurance companies, block granting Medicaid to the states and allowing them to use funds to covert Medicaid and SChip to private insurance vouchers, converting VA benefits to vouchers for private insurance (but supplement all extra costs), and eliminating the tax incentive gap between employer-based insurance and personal insurance. The last reform would involve either the elimination of the employer tax exclusion for health insurance, or the extension of that deduction to individuals who buy health insurance.
All of these reforms will have the effect of creating downward pressure on healthcare costs, while concurrently restoring the concept of health insurance to its original purpose – long-term protection; not a third-party market-distorting payment system. Only these free-market reforms will lower healthcare costs to the extent that the payroll taxes would, for the most part, cover the medical costs of retirees.
In order to achieve these reforms, the next president will have to eloquently tell the truth about Medicare to the American people. These free-market reforms will lower the cost of healthcare for everyone; however, future retirees will have to pay a reasonable, albeit higher price for their healthcare than they do under the current system. As long as people are misled to believe that they pay for every cent of the current Medicare system, such reforms are untenable. The next generation of retirees must understand that they are paying less than 50% of their Medicare benefits, a reality that is unsustainable. They must come to realize that nothing in life is free, certainly not the best healthcare system in the world. We all know those people who complain about paying even a $20 co-pay for medical care, while blithely shelling out hundreds of dollars for car repairs. If we continue to seek the best healthcare for free, we will become free of the best healthcare system in the world. We simply don't have the money.
While it is impossible to continue a system in which we enjoy the best healthcare for free, the next best option is a system that is reasonably affordable. There is only one panacea for our healthcare ailments; free-market reform – along with veracious leaders to champion the prescription.