Two major culprits responsible for our financial mess are Medicare and Medicaid. These entitlements were created in 1965 as part of the Social Security Act. Just like Social Security, the assumptions upon which these programs were based turned out to be wildly off. At passage, Medicare was forecasted to cost $12 billion per year by 1990. This projection turned out to be a little low - the actual cost in 1990 was $109 billion. Congress was only off by 813%! In fairness, it would have been difficult to predict the great advances in medicine since 1965 which have resulted in significantly higher costs. More likely though, the low forecast was from the failure to predict that the entitlement itself would create its own demand.
Medicare costs continue to increase at an astounding pace. In 2009, total Medicare costs were $502 billion, an amount double the total for 2001. The hospitalization benefit is primarily paid by payroll taxes, while supplemental insurance is mostly paid from general funds (75%) and recipient premiums. General funds paid for $211 billion in supplemental costs in 2009, so payroll taxes and premiums cover less than 60% of the cost of the program. Medicare total unfunded liabilities are estimated to be at least $30 trillion, which is close to twice our country’s Gross Domestic Product. Medicare costs are projected to double as a percent of GDP over the next 20 years as our society ages.
Like Medicare, Medicaid costs were underestimated, costing 7 times its original projection for 1990. In 2009, Federal spending on Medicaid was $251 billion, double the amount from 8 years prior like Medicare. However, this only represents about 60% of the total cost, as another $150 billion or so is paid by the states. It is currently estimated that there are 50 million people in this country receiving Medicaid, or about 1 in 6 people. In my previous post I mentioned that there are only 3.3 workers per social security recipient. Well, these 3.3 people also have to support these 50 million people who are on welfare, a number not much less than retirees. Medicaid costs as a percentage of GDP are expected to go up by 50 to 60% over the next 20 years.
Once again we see government programs costing way more than originally intended, and the overruns just shoved into the deficit for the next set of politicians to worry about. The next post will discuss the Great(?) Society programs.