Code Red: Two Economists Examine the U.S. Healthcare System

September 14, 2012

On Shakespeare, the Fells, and Medicare

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:43 am

I recently returned from a blissful two weeks in the United Kingdom. My wife and I visited Edinburgh for the first time, London for the third, and spent a week in-between hiking around the intensely beautiful Lake District. Our hiking companions were truly remarkable. Our guide was in his mid-60s and could not have been fitter. For fun, he likes to walk across England from the North Sea to the Irish Sea. As this involves crossing both the Pennine Range and the Fells of the Lake District, this is no Sunday walk in the park! Our other hiking mates were an Australian in his mid 60s and a Californian in her late 70s. We hiked 3-5 hours daily with average elevation changes of nearly 1000 feet. My wife and I are in pretty good shape but our mates often walked circles around us.

We prepared for our trip by reading up on Scottish history and on Shakespeare (in preparation for seeing Richard III at the Globe Theatre.) It seems that nearly all Scottish Kings died when they were young, sometimes in battle but mainly from disease. Mankind is fortunate that Shakespeare reached the ripe old age of 52, although he had not written a great play for many years before his passing.

All of which brings me to the subject of this blog – the crisis in Medicare. When Congress enacted Medicare in 1965, it was embraced by nearly all Americans as a sort of intergenerational social contract. (If you prefer, think of it as a contract between our younger selves and our older selves.) The terms of the contract read something like this: Work until you reach old age and retire; after that, younger Americans will pay for your medical care. In this way, Medicare mirrored the Social Security social contract enacted in 1935.

For the purposes of these social contracts, “old age” was defined to be age 65; this became our de facto retirement age. This was a reasonable choice at the time. When Social Security was enacted in 1935, life expectancy was just 62 years. In 1965, life expectancy was 70. But this is no longer reasonable. By 2020, life expectancy is expected to surpass 80, and most Americans will enjoy good health during these additional years. “Retirement” is no longer the last phase of our lives; it is the start of our extended “second lives.”

Today’s Medicare social contract has new language: Work until your health insurance is guaranteed and paid for by younger Americans, and then feel free to begin your second life. When you finally do reach old age, pray that there is enough money to pay for your medical care. But does anyone believe that this new social contract makes good social policy? Would our younger selves and our older selves be reconciled to this deal? I doubt it.

My point isn’t just the obvious one that the number of retirees is swamping the number of working Americans, and in the process is overwhelming the Medicare budget. My point is that extended life expectancies have redefined the Medicare social contract, so that Medicare is not the program that Congress ratified in 1965. Working Americans still subsidize medical care for the elderly. But they also subsidize medical care for “seniors”, a vibrant group of individuals enjoying their second lives, a group that scarcely existed when Social Security and Medicare were enacted.

Every year that passes, we live a little bit longer and a little bit healthier. As we do so we dig a deeper hole for Medicare and further distance ourselves from the program’s original purpose. Congress could have prevented these problems by pegging the age of eligibility to life expectancies. It is not too late to correct this mistake. The age of eligibility for Social Security is set to increase to 67 in 2022, but that probably won’t keep up with continued increases in life expectancy. And there is no similar increase planned for Medicare. The hole keeps getting deeper.

It is time to return Medicare to its initial social contract. Working Americans should subsidize the elderly. I am willing to postpone starting my second life for a few more years; I hope all working Americans are prepared to do the same.

2 Comments

  1. There is a further breakdown in the social contract that must be discussed. Due to the rapid growth in the cost of medical services, individuals are receiving far money in services while seniors than they paid in benefits while working. The Washington Post summarizes an Urban Institute analysis of this phenomenon below:

    “Consider an average-wage two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services – including prescriptions and hospital care – worth $355,000, or about three times what they put in.” http://www.washingtonpost.com/wp-dyn/content/article/2011/01/02/AR2011010203213.html

    While we can quibble about the exact numbers, it is clear that Medicare is offering a pretty good (and likely unsustainable) return on investment for current seniors. Compare this to social security where the same two-earner couple would pay $614,000 in taxes but only receive $555,000 in benefits.

    This is just a further example that the current path of Medicare is not sustainable. Like David, I have severe doubts that the current reforms in the ACA will do much to change the program cost projections.

    Comment by Craig Garthwaite — September 14, 2012 @ 9:35 am

  2. Furthermore, it’s my understanding that the new “Medicare” taxes in the ACA (0.9% surcharge if your income is above $250k, and the new 2.9% tax on unearned income regardless of your income) are NOT legally earmarked for Medicare. They will go into general revenue funds. One could therefore argue this is a general tax increase that is disguised as extending Medicare’s solvency.

    Comment by Herm Stonitsch — September 15, 2012 @ 9:23 am


RSS feed for comments on this post.

Blog at WordPress.com.

%d bloggers like this: