Medicare vs. Obamacare

[updated below]

Andrew Biggs crunches some numbers on Medicare over at the AEI blog.   Contra Minnesota Republican Rep. Michele Bachmann and others adopting the new “Obamacare vs. Medicare” talking points, Biggs rightly points out that Medicare is not a program conservatives should be defending.  Conservatives should be looking at ways to reform Medicare, certainly, but defending it without caveats while decrying the government-run-health care bogeyman is ludicrous.  A reformed, solvent entitlement may worth be defending, but the status quo is not.

Biggs explains why the notion that seniors’ have paid for their own benefits is simply not true:

Let’s start with a typical person who was born in 1944, began work at age 21 in 1965, and in 2009 retired at age 65 and enrolled in Medicare. Over the course of his life he paid the Medicare tax out of his wages (see here for historical tax rates). According to the 2009 Medicare Trustees Report, the average Medicare benefit per person in 2008 was $11,012. From this, we subtract the average Medicare premium of $1,288 to produce an average net benefit of $9,724. I’ll assume that this person collects the average Medicare benefit from age 65 through age 83 (his life expectancy as of age 65).

But unlike Social Security benefits, which increase only to keep up with inflation, Medicare benefits grow in real terms. The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.

To make taxes and benefits comparable, I convert each to present value terms, assuming a real interest rate of 3 percent. This means that taxes paid in the past have 3 percent interest added each year, to account for the fact that these taxes could otherwise have been invested. Likewise, future benefits have 3 percent annual interest deducted, to account for the fact that retirees must wait to receive them.

So what do we get? This typical person paid around $64,971 in Medicare payroll taxes over his lifetime. Likewise, after netting out Medicare premiums, he’ll receive around $173,886 in lifetime Medicare benefits. The net? He can expect to receive around $108,915 more in benefits than he paid in taxes over his lifetime.

To put this in perspective:

Like Social Security, Medicare is simply not sustainable without serious overhaul, regardless of its popularity or the political benefits to opponents of Obamacare who have chosen to exploit that popularity.  It’s disingenuous for conservatives to pretend otherwise.

Without means-testing and other significant overhauls to how we think about entitlements, future beneficiaries will face massive cuts, and quite possibly see a negative return on taxes spent on the program.  Conservatives should not be defending Medicare.  Conservatives should point out that adding yet another financially insolvent entitlement to the cadre we already have is unsustainable without defining exactly how to pay for it.  Conservatives should work toward new solutions to fund any new entitlement, including the possibility of a VAT since one smart area for compromise in entitlement reform and implementation is the means to secure revenue (another being the means to distribute benefits); and conservatives should present alternatives, such as real market reforms for the health insurance industry coupled with better, national regulations that allow interstate trade and competition to occur.

The status quo, however good the health care results it delivers may be, is still lousy as a system of insurance.  Conservatives should use the health care reform debate to reinvent how we think about entitlements and safety nets from the ground up.

At some point these fiscal reforms will be necessary – as the federal deficit under big spenders like George W. Bush and Barack Obama piles up one administration to the next, and special interests, labor groups, and other government beneficiaries grow increasingly powerful and increasingly vested in government intervention into the economy, the poorer and poorer the results of these programs will become.

It’s very sad that the last real success in entitlement reform occurred under Bill Clinton’s watch.  George W. Bush spent too much political capital in Iraq to push much needed Social Security reform, and the pendulum has swung now in favor of the Democrats, who threaten to increase spending on just about everything imaginable – from defense to climate change legislation to health care – and who promise to do so in whatever way is politically feasible regardless of the consequences or efficacy of these reforms, because “any reform is better than no reform.”  (Or is it?)

With all this in the balance, why is it so hard for Republicans to stay on message – or to even construct a message to begin with?  Even if it’s working, obstruction is no way to govern in the long haul.  Images of angry town hall protesters are not comforting to the vast bulk of Americans.  Someday Republicans are going to need to govern again and the public will need to have faith that they can govern competently.

Medicare is a popular entitlement, but it’s going to have to face changes one way or another down the road, and some people are going to lose their benefits in the process.  We should be talking about health care vouchers, free markets, and responsibility.  We should be talking about avoiding monopoly in favor of competition.  We should be talking about the moral impetus to cover the uninsured because there is a moral impetus at the heart of this debate, and there is no reason it should be the sole property of the left.

This faux-crusade to “protect” Medicare from the government is just absurd.  “Keep your government hands off my Medicare” was a funny line.  That Republicans have taken it up as a cause is simply farcical.

Update.

See also, Dave Schuler.’

Update II.

Andrew Biggs updates his numbers to adjust for mortality:

What’s the result? The typical 21-year-old as of 1965 would have paid around $62,290 in Medicare taxes (versus $64,470 on a non-mortality adjusted basis) while receiving around $140,346 in benefits (versus $173,886 on a non-mortality adjusted basis). So Appel’s point clearly has merit.

That said, the broader point still stands: in my original calculations, a new retiree in 2009 would have paid Medicare taxes equal to around 37 percent of his expected benefits. Adjusted for the chance of dying before retirement, that share rises to only 44 percent. So even with reasonable adjustments for mortality, the typical retiree today has paid for less than half the Medicare benefits he can expect to receive over his lifetime. Importantly, rising life expectancies will tend to increase benefits more than taxes, making today’s deal better over time.