An Inconvenient Financial Truth – Healthcare Costs Endanger U.S. Financial Stability

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The federal government has made financial promises over the next 75 years at an estimated value of $50 trillion dollars. According to the Government Accountability Office (GAO), medicare obligations alone represent almost $39 trillion of that amount and have increased 197% since 2000 [1].

You read that right — future Social Security benefits and future Medicare benefits increased 197% from 2000 to 2006.

And — here’s the clincher — in the absence of extensive reform to both the Medicare program and the nation’s healthcare system, the government won’t have the money to meet those financial promises.

The nation’s top accountant, U.S. Comptroller General David Walker said in a recent interview:

We don’t face an immediate heart attack, but we have been diagnosed with fiscal cancer and we need to start treating it.

The cancer, Walker says, are massive entitlement programs we can no longer afford. Indeed, according to Walker, the recent Medicare prescription drug bill signed into law is:

… probably the most fiscally irresponsible piece of legislation since the 1960s, because we promise way more than we can afford to keep.

To give you an idea of the magnitude of the problem, if we eliminated all waste and fraud as well as the entire Pentagon budget, the long-range financial projections barely change. It’s an actuarial nightmare.

Before you decide it’s not your problem, consider what Marc says at Marc Joseph Nutrition:

… if you’re currently receiving or will soon qualify for Medicare, there will likely need to be significant reductions in the benefits offered to keep the program from going bankrupt.

And if you’re younger, there are several big reasons why you should care:

Your parents’ Medicare benefits will likely be reduced, and that, in turn, may directly affect their out-of-pocket costs and potential dependency on you to help pay for them.

Your taxes will likely be raised to keep Medicare solvent.

The level of Medicare benefits available today most certainly will not be available to future generations.

Current fiscal policy is unsustainable

The GAO evaluated the federal government’s income, liabilities and future obligations and concluded that the numbers simply don’t add up. It’s been called the “dirty little secret everyone in Washington knows” but doesn’t want to talk about. David Walker does, and has given up speaking to elected officials and taken his message directly to taxpayers and opinion makers, hoping to shape the debate in the next presidential election.

As a country, the U.S. faces large and growing structural deficits, largely due to known demographic trends (meaning baby boomer retirement) and rising health care costs. Walker has been telling civic groups, university forums and newspaper editorial boards that the U.S. has spent, borrowed and promised itself into such a deep hole, it will be unable to climb out if action is not taken now.

He believes the current health care system is way too expensive and overrated:

On cost we’re number one in the world. We spend 50% more of our economy on health care than any nation on earth.
We have the largest uninsured population of any major industrialized nation. We have above average infant mortality, below average life expectancy and much higher than average medical error rates for an industrialized nation.

Over the next 25 years, the number of Americans aged 65 and up is expected to grow from 12% of the population to 20%. In contrast, the working age population will decrease from 60% of the population to 55%, resulting in a relative decrease of approximately one-third of workers paying into Social Security and Medicare [2].

Federal Reserve Board Chairman Ben Bernanke has remarked:

… The aging of the population is likely to lead to lower average living standards than those that would have been experienced without this demographic change.

The GAO has concluded that economic growth alone cannot solve the problem. Here’s why: during the 1990s, the U.S. economy grew at an average 3.2% per year. Closing the current long-term fiscal gap would require average U.S. economic growth in the double digit range every year for the next 75 years.

Assuming that the growth rate of health care costs does not change, Medicare and Medicaid will grow by approximately five times as a share of the economy Gross Domestic Product (GDP) by 2050. GAO projections show that by as early as 2024, Social Security, Medicare, Medicaid and net interest will consume all federal revenues; by 2037 the federal government deficit will reach 20.5% of GDP, exceeding the size of today’s federal budget [2]. By way of comparison, current federal spending on Social Security, Medicare and Medicaid as a percentage of GDP is approximately 8% [3].

If nothing happens by 2040, Walker warns:

… the federal government’s not gonna be able to do much more than pay interest on the mounting debt and some entitlement benefits. It won’t have money left for anything else ““ national defense, homeland security, education, you name it.

Bipartisan agreement

Since September 2005, Walker and representatives from both sides of the ideological divide have been touring the country as part of the Fiscal Wake-Up Tour. Participants include:

Robert Bixby, Executive Director of The Concord Coalition, a bipartisan organization that advocates fiscal reform and balanced budgets.
Harry Zeeve, National Field Director of The Concord Coalition.
Isabel V. Sawhill, Senior Fellow and Vice President and Director of Economic Studies at the moderate-to-liberal The Brookings Institution, a private nonprofit organization devoted to research and innovative policy solutions.
Alice Rivlin, budget director under President Clinton and now a Senior Fellow and Director, Greater Washington Research Program, The Brookings Institution.
Stuart Butler, Vice President for Domestic and Economic Policy Studies, The Heritage Foundation, a think tank whose mission is to formulate and promote conservative public policies.
Alison Fraser, Director, Thomas A. Roe Institute for Economic Policy Studies, The Heritage Foundation.
Brian Riedl, Lead Budget Analyst, The Heritage Foundation.
Maya MacGuineas, President, Committee for a Responsible Federal Budget, a bipartisan, non-profit organization committed to educating the public about issues that have significant fiscal policy impact.
Joe Minarik, Senior Vice President and Director of Research, Committee for Economic Development, which addresses national priorities that promote sustained economic growth and development.

While the group, which spans the political spectrum, doesn’t agree on solutions, its members acknowledge that nothing can be done politically if Americans remain ignorant of the problem.

The real problem

According to Walker, the real problem is healthcare costs; the Medicare problem is five times greater than the Social Security problem. Medical costs are rising at twice the rate of inflation [4]. Additionally, people are living longer today.

Walker sat down with CBS 60 Minutes correspondent Steve Kroft for an interview on the possible financial troubles the U.S. is heading toward – watch the video. It’s an informative and provocative interview. Walker also offers a video presentation at the GAO website about America’s current financial condition and long-term fiscal outlook.

Drastic changes are on the horizon for the Medicare program and Social Security. One of the most important things as individuals we can do to minimize the impact of those changes is to stay healthy. As Marc says at Marc Joseph Nutrition, one of the best ways to do that is with nutrition:

Nutrition is the primary factor that determines whether you’ll develop a chronic disease. Fortunately, it’s a factor that you can control. Those people who take preventive steps now will be better off and reduce the need to draw upon what will surely be a less appealing health care system down the road.

Take the time and educate yourself so that you can take better care of you and your loved ones.