Getting Medicare off life support

Today I’m writing about the second-largest spending program but the one in the most trouble: Medicare, which provides health insurance and prescription drug coverage to approximately 47 million elderly and disabled Americans.

Why am I on this entitlement kick? Because these so-called “mandatory spending” programs are the greatest driver of our nation’s future fiscal and economic problems. And if Washington doesn’t get it together soon, it will mean big problems for everyone. And by everyone, I mean anyone who pays taxes, hopes to get, keep or create a job, or who relies on, or someday may rely on, one of these programs.

Mandatory programs — the largest of which are Medicare, Medicaid and Social Security — take up about 55 percent of all federal spending. But as the massive baby boom generation moves into retirement, the size and costs of these programs will explode. By 2020, less than a decade from now, these programs (including interest payments on the national debt) are projected to consume a whopping 90 percent of the entire federal budget: a shocking 90 cents out of every dollar you pay in taxes. Again, the situation just gets worse from there.

Let’s look at what’s going on with Medicare specifically.

Every day, more than 10,000 baby boomers are aging into Medicare. Over the next decade, roughly 16 million new beneficiaries will be added to the program.

According to the August 2010 Medicare Trustees’ report, Medicare will run out of money by 2029 — about the time today’s 45-year-olds will be at or near retirement. This is an optimistic estimate — it assumes all of the savings claimed in the 2010 health care reform law will materialize.

As you can imagine, this creates significant problems for Medicare and the seniors who rely on it. Conservative estimates of the trustees’ report cite that over time, Medicare is $22.5 trillion in the hole.

What does all this mean for us?

First, it will mean Medicare spending takes up a greater share of our economy. As government spending explodes, it will crowd out the private sector’s ability to create jobs (or even keep businesses’ doors open). And trying to chase this spending with ever-higher taxes and borrowing (keep in mind we’re already more than $14 trillion in debt) will cripple any hope for a stable, let alone strong, American economy.

Second, it will mean little is left to fund anything else you might want the government to do. Today, Medicare is funded through three primary mechanisms: general revenues (43 percent), payroll taxes (37 percent) and premiums (13 percent). This ratio was not always so skewed toward general revenues (a fancy name for personal and corporate income taxes). Just 10 years ago, Medicare relied on general revenues for only 20 percent of its budget. The more the program relies on basic income taxes, the fewer of these dollars there are for other spending priorities.

Remember, within a few years, entitlements and interest on the debt will consume 90 percent of the budget, leaving only 10 percent to cover discretionary items. This means that programs such as education, transportation, defense, and homeland security will have to cut their budgets by 75 percent.

Finally, it would mean that eventually — far sooner than any of us would hope — these critical programs would grow themselves right out of business, leaving the most needy among us without a reliable safety net.

So what’s our choice? Leave these programs as they are, headed right into bankruptcy and projected to take our economy and jobs with them? Or transform them to protect them for current beneficiaries, preserve them for future beneficiaries, and prevent them from bankrupting themselves and the nation? I choose the latter.

More important is that we make sure Congress chooses the latter.

As both the Republican-led House of Representatives and the Democratic-led Senate roll out their budget plans for the coming year, it’s up to us to keep the pressure on all in Washington to do the right thing. Yes, that means cutting spending. A lot. But it also means transforming our largest entitlement programs, starting with Medicare, the one in the most trouble, so America can keep its promises to today’s seniors — and keep the promise alive for tomorrow’s seniors.

J.C. Watts (JCWatts01@jcwatts.com) is chairman of J.C. Watts Companies, a business consulting group. He is former chairman of the Republican Conference of the U.S. House, where he served as an Oklahoma representative from 1995 to 2002. He writes twice monthly for the Review-Journal.