As costs swell, a gloomier outlook for Medicare's future

A new report raises doubts about the program's sustainability - but some call the news a 'scare tactic.'

Medicare's financial outlook is deteriorating because of the new prescription drug benefit and other changes that will swell costs to the program by more than $500 billion over 10 years, the program's trustees said Tuesday in their annual report.

They said Medicare will have to begin dipping into its trust fund this year to keep up with expenditures and will run out of trust money by 2019 without changes in a program that is swelling because of rising health costs and a new prescription drug benefit.

The deteriorating financial picture for the health care program for older and disabled Americans is a result, in part, of the new Medicare prescription drug law that will swell costs by more than $500 billion over 10 years,

Provisions of the law that President Bush signed into law in December "raise serious doubt about the sustainability of Medicare under current financing arrangements," the trustees said.

Social Security's is still projected to run through its trust fund in 2042. Payroll tax revenues would continue to flow into the program, financing 70 percent of its benefit costs. Medicare, too, will continue receiving revenues after 2019.

White House spokesman Trent Duffy said the rising cost of health care - and not the prescription drug program - are causing Medicare costs to swell. "It's health care costs - over 70 percent," he said. "Not prescription drugs."

Government officials have been predicting for years that the retirement insurance and health care funds for the elderly - both financed through payroll taxes - will be pushed toward insolvency as more post-World War II baby boomers reach 65.

An existing surplus built up by taxes on baby boomers is likely to start dwindling by the end of the decade just as they start retiring, said analysts across the political spectrum in anticipation of Tuesday's annual report by government trustees of the Medicare and Social Security programs.

"There will be a general worsening of the financial condition of Medicare," said Robert Moffitt, a Medicare expert at the conservative Heritage Foundation.

But critics accuse the Bush administration of using scare tactics in its gloomy report on the status of the Social Security and Medicare systems in an effort to forward privatization of a portion of the pension system.

David Langer, a New York actuary who has examined the actuarial projections of the Social Security trustees for eight years, says it is not possible "to make plausible assumptions over 75 years," as is required by law. His study of past projections of Social Security assets finds that the intermediary projection - the one favored by the trustees - has proved on average to be 11 percent too low in the 1992-2002 period. The low-cost projection has been right.

He adds that a "very little" change in assumptions, such as future interest rates, makes a huge difference in results. In last year's report, the low-cost 75-year projection for Social Security showed a $1.1 trillion surplus, for instance.

A Center on Budget and Policy Priorities study calls such "infinite horizon" projections as "dubious." It notes that a majority of the trustees are administration cabinet officials or administration appointees.

"This episode suggests that the administration may understate costs when it suits its purposes (as with its tax cuts and the Medicare drug bill) and overstate figures when its suits its purpose," write Robert Greenstein, head of CBPP, and Peter Orszag, a Brookings Institution economist.

Tuesday's reports came days after the US Census Bureau forecast that US population will grow to 420 million at midcentury, rising nearly 50 percent from 2000. Americans will get a bit grayer, too, by 2050 - nearly 21 percent of residents will be age 65 or older, compared with 12 percent now.

That rate of growth is slower than in the latter part of the 20th century.

The trustees' report is the first official estimates of the long-term costs of the Medicare law adding a prescription drug benefit. Like last year, the trustees said that projected lower tax receipts devoted to the program and higher expenditures for inpatient hospital care also contributed to the growing financial problem.

Last year, Medicare's trust-fund insolvency date was moved up to 2026 from 2030. The date when Social Security would run through its trust fund, by contrast, was extended by a year: to 2042.

Republicans pressed for the overhaul of Medicare last year to give private insurers a much larger role in the program as a way, Bush and others said, to control long-term costs.