TCS Daily

Phase Out Medicare

By Arnold Kling - December 16, 2002 12:00 AM

With the recent shake-up in the Bush Administration's economic team, some pundits are clamoring for a bolder economic policy. That got me to start thinking about how I would respond if someone were to ask me for a bold, specific economic plan. This is where I come down.

The most critical economic issue for the 21st century is socialized medicine. Largely because of Medicare, the default scenario for the United States in the middle of the century is that government spending on health care will be about 10 percent of GDP. It could be twice that under a "single-payer" system, as endorsed by former Vice President Al Gore.

With Republicans in control of Congress and the Presidency, this may be the last chance to change course in this country. If we continue on the path of socialized medicine, there is every reason to fear that the United States will fall into the debilitating, low-growth, over-taxed trap that has Europe and Japan in its grip.

If the Bush Administration is looking for a bold economic agenda, then the best choice would be to take steps to return health care to the private sector. The most effective way to do this would be to raise the Medicare eligibility age for everyone under the age of 50.

Bigger Than Social Security

As large as Social Security looms when the Baby Boom retires, it will be smaller as a proportion of GDP than Medicare. An analysis for the Concord Coalition reports that starting from a current ratio of 2.2 percent of GDP and making some conservative assumptions "just the increase in Medicare spending over the next forty years - 4.5 percent of GDP - would be greater than everything we spend today on Social Security."

A column by David Wessel in the Wall Street Journal includes a dramatic chart showing projected Federal outlays over the next half century. While Social Security levels off at around 5 percent of GDP and other spending shrinks from about 10 percent of GDP to about 5 percent of GDP, by 2050 spending on Medicare and Medicaid hits 10 percent of GDP and is still climbing.

These projections for Medicare and Medicaid costs may be optimistic. Speaking as part of a broad-ranging round table discussion, economic historian Robert Fogel says that the health care sector of the economy is undergoing a secular increase, which he believes could take it from 14 percent of GDP today to 21 percent of GDP later in this century. My guess is that if he is correct, then Medicare spending alone will be more than 10 percent of GDP.

How to Phase Out Medicare

I believe that if we are going to stay out of the government-expansion trap that has been set for us, and the high-tax future that it implies, we will have to do more than just tinker with Medicare at the margins. We need to phase it out. (Actually, what I am proposing would reduce the size of Medicare, but not phase it out completely.)

The most practical way to phase out Medicare is to raise the age of eligibility, so that people spend more of their lives paying for their own health insurance and less of their lives taking government money. However, it seems to me that it would be unfair to change the terms of the social contract for people who are within 15 years of the traditional retirement age of 65. Therefore, I would start to phase out Medicare for people aged 50 and younger (which includes me - barely).

I would immediately raise the Medicare eligibility age to 75 for everyone aged 50 and younger. Then, I would index the eligibility age to average longevity, so that the eligibility age continues to rise as longevity increases. If longevity continues to increase at the rate of about 1/4 year per year, then the eligibility age would rise at that rate.

Once you reach 50, your eligibility age would be locked in. For example, someone who is 46 today would be given an initial eligibility age of 75. However, by the time they reach 50, the eligibility age might have increased to 76. At that point, that person's Medicare eligibility would be locked in to age 76.

For Social Security, a similar change to the retirement age would be an effective way to move in the direction of privatization. Moreover, David Levine estimates that by a much less Draconian increase in the Social Security retirement age (moving it to 70 in the year 2030), we could eliminate the projected deficit in that program.

The Sugar Coating

The Medicare phase-out would produce long-term benefits for the economy, but it offers relatively little in terms of short-term economic or political advantage. One short-run gain might come from lower long-term interest rates, as the bond market calculates the reduction in future government liabilities. However, particularly given the high unemployment rate, we should be looking for a sugar coating for the phase-out plan. I have two proposals in that regard.

First, I would propose eliminating the Medicare tax, which would lop about 1.5 percentage points off of the odious payroll tax. In the short run, I would recommend not cutting spending elsewhere, and instead letting this serve as an economic stimulus. Once the unemployment rate falls to a more reasonable level, we could try to find spending cuts elsewhere in the government Budget to offset the shortfall in payroll tax revenues.

The second sugar-coating proposal would be a new government-matching IRA account for people born in 1953 or later (i.e., those affected by the increase in the Medicare eligibility age). The idea would be to encourage people under the age of 50 to save money for their old age by providing both tax advantages and government matching funds. These savings accounts would help people to support themselves until they reach the age when they are eligible to receive Medicare.

Willie Sutton said that he robbed banks "because that's where the money is." In the 21st century, the size of government will be determined by the mix between public and private spending on health care, because that is where the money will be. Under current policy, those of us who favor a smaller government are on a losing course. Our number one priority should be to phase out Medicare.



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