Read our related article on the Social Security trust fund in this week’s issue.
With over 78 million baby boomers born between 1946 and 1964, there is no question that the American population is aging. As this happens, more Americans will be eligible for government entitlement programs, including Medicare, Medicaid and Social Security. With both an aging population and rising medical costs, there will be a “rapid expansion” of expenditures for entitlement programs, says Federal Reserve Chairman Ben Bernanke.
Just how solvent are these programs? Are funds really running dry?
In 2007, 12% of the American population was at least 65 years old, but by 2030, 19% of the population will have reached this age. This demographic change is not just a temporary phenomenon, as demographers predict that fertility rate will remain constant, while life expectancy will continue to increase. While a 7% increase may seem small, it will place a strain on entitlement programs. This year, the first of those 78 million baby boomers will retire and become eligible for Social Security. Three years later, they will be eligible for Medicare.
To assess the sustainability of entitlement programs, the Congressional Budget Office (CBO) measures their cost as a percentage of gross domestic product (GDP). A budget deficit occurs when federal spending exceeds revenues. To fix the deficit, the government must sell Treasury securities, which increases federal debt. Over the past 50 years, federal spending on entitlement programs has increased dramatically. In 1975, 25% of federal expenditures financed Medicare, Medicaid and Social Security. Today, over 40% of expenditures (or 8.5% of the GDP) is used for these programs. By 2015, entitlement programs will require 10.5% of the GDP, by 2030 they will need 15%, and by 2050, they will require 18.6% (see Table 1).
Table 1: Major Entitlement Will Expand to 18.6% of GDP
Of the three entitlement programs, Medicare and Medicaid face the most pronounced financial difficulties, as total healthcare spending has grown faster than the economy. Created in 1965 to provide medical care for Americans age 65 or older, 44.1 million Americans were enrolled in Medicare in 2007, costing the Federal government $432 billion in total expenditures.
Unlike Social Security, both Medicare and Medicaid are affected by rising healthcare costs. Despite improvements in technology and health insurance coverage, national health expenditures (NHE) increased from 5.1% of GDP in 1960 to 14.1% of GDP in 2001. According to the CBO, the annual cost per enrollee has exceeded GDP growth by 3% since 1970, causing excess cost growth. Using this historical relationship, the Medicare Board of Trustees predicts that Medicare expenditures will increase from 3.2% of the GDP in 2007 to 10.8% in 2082 (see Table 2). This increase is equivalent to around $916 billion, costing an additional $7,930 per household, says the Heritage Foundation, a conservative think tank.
Table 2: Medicare Expenditures as a Percentage of the Gross Domestic Product
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