There’s a scary graph in Wisconsin Rep. Paul Ryan’s new budget blueprint that shows the federal government’s “unfunded promises” rising from $76.4 trillion in 2010 to $99.6 trillion in 2011.
That’s $23.2 trillion in just one year.
The entire U.S. economy produces about $15 trillion in gross domestic product each year. So if it seems preposterous that the government’s “unfunded promises” grew by that much in just one year, that’s because it is.
Most of what the Wisconsin Republican calls “unfunded promises” are the future Medicare benefits that the government expects to have to pay through the late 2080s. To get a scare out of Medicare, you have look seven decades into the future.
But here’s the reality: Medicare has been a solid investment for 47 years. It’s also in good shape for the foreseeable future.
Of all the hot air in Washington, Ryan’s hackneyed Medicare scare is the hottest. The Medicare Trust Fund isn’t actually a trust fund; it isn’t really going bankrupt. Oh, and most of Medicare isn’t even connected to those funds anyway.
Here’s how it works.
As every senior citizen knows, Medicare is incredibly complicated. It has four parts. Part A covers hospital bills. Part B covers doctors’ bills. Part C is an optional private insurance plan. Part D is a private insurance plan for prescription drugs.
There are two Medicare “trust funds.” The Hospital Insurance (HI) trust fund supports Medicare Part A. The Supplementary Medical Insurance (SMI) trust fund supports Parts B and D. There is no trust fund for Part C.
The HI trust fund, which pays hospital bills, is the one Ryan is worried about. It is currently $238 billion in the black and takes in an annual income of $229 billion. Those are some pretty big figures, but Medicare is still running a multi-billion dollar deficit and is expected to run through its treasure chest in about 12 years.
The HI trust fund is supported by a 2.9-percent tax on wages, split evenly between wage earners and their employers.
On top of this, an additional 0.9-percent tax on wages over $200,000 for individuals ($250,000 for married couples filing jointly) will start flowing to the HI trust fund in 2013 under the Affordable Care Act.
Even with these extra revenues, the HI trust fund is projected to go bankrupt in 2024. But “bankrupt” doesn’t mean “bankrupt” in the sense of going out of business. It only means that the trust fund account will turn negative for the first time.
In other words, around the year 2024 — for the first time in its history — Medicare Part A will start to cost the federal government money. After 2025, the losses are expected to be in the range of $40-$60 billion per year.
By that time, the total federal budget is expected to be over $4.5 trillion, so we’re talking about a Medicare Part A deficit amounting to a little over 1 percent of the federal budget.
So what about those so-called “unfunded promises”? Extend a growing trend out long enough and you can make the number as big as you like. But projecting the future Medicare costs of people who have not yet been born is simply disingenuous.
There are plenty of real challenges facing America this election year. Three of the most important are jobs, jobs, and jobs. Potential problems in Medicare and Social Security 50 or 75 years from now just don’t measure up. It’s not time to hit the panic button just yet.