Paying for Medicare Now and in the Future

Abstract

Medicare celebrated its golden anniversary this past year. The program now provides insurance coverage for over 50 million Americans, and accounts for 20 percent of the nation's health care spending. Its shares of the nation's output and total health care spending have grown significantly over its first 50 years. Here we note how Medicare spending is projected to grow based on several alternative forecasts. We then estimate how lifetime Medicare benefits, taxes, and premiums are distributed across and within generations. Our estimates show that Medicare is progressive within generations. We also show that that across generations the program has, up to now, provided increasing replacement rates relative to pre-retirement earnings. Accounting for all lifetime taxes and premium payments in support of the program, we estimate that net benefits for medium earning workers will remain positive even for today's new labor force entrants. Though the program is progressive within generations, each generation's retirement benefits are paid in part by higher taxes on succeeding generations. Moving toward equalizing the tax burden across generations can be accomplished by constraining the tax financed portion of Medicare so that per capita spending grows at the same rate as per capita GDP. We outline four alternative ways to recast the program's financing and insurance structure so as to constrain the tax-financed portion of retiree health care spending.