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A Medicare Check-up

May 14, 2011 • Demand, Supply, and Markets, Economic Debates, Economic History, Government, Households, Macroeconomic Measurement, Thinking Economically • 114 Views    No Comments

We could say that Medicare is currently a bit ill and the prognosis is not good. Last year it received some “medicine” through the Affordable Health Care Act but its caretakers, the Medicare trustees, question whether the treatment will work.

Submitted to Congress yesterday, here is the 2011 annual report from the Medicare trustees.

A Washington Post article explains what all of this means.

1. Passed during 1965, Medicare is a “federally administered health insurance program authorized… to cover the cost of hospitalization, and some related services, for most people over age 65.” (p. 249)

2. Funding for Medicare comes from a payroll tax of 2.9% of our paychecks. Before the end of 1993, maximum earnings of $135,000 were taxable. In order to increase Medicare’s revenue, on January 1, 1994, the cap was removed.

3. Medicare needed more revenue because of the baby boomers. The extra money would be needed when the baby boomers swamped the system.

4. The baby boomers, who just started turning 65 this year, represent a surge in the population. Born after World War II until the mid-1960s, their numbers far exceed any other demographic group. And that is the problem.

5. This year according to the annual report from the Medicare trustees who oversee its finances, more money was spent than received in Medicare taxes. Consequently, they had to dig into the Medicare trust fund. Since 2008, they needed trust fund money and project continuing to need it until 2024 when it will have nothing left.

The Economic Lesson

Totaling close to $272 billion, the Medicare trust fund is composed of U.S. treasury securities. In 2010, they had to redeem $32.3 billion in securities “to cover the shortfall of income relative to expenditures.” (p.4) The shortfall related to less tax revenue because of the recession and rising medical costs.

An Economic Question: Economists usually say that we tend to think at the margin. Rather than all or nothing, usually, we do a little bit more or a little bit less. Where? At the margin. For Medicare everywhere we look, we see concern at the margin. Explain why older Americans, younger Americans, physicians, drug companies and Congress each have a different concern at the margin.

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