Medicare's trustees report that, if current trends continue, Medicare will go broke by 2019, eleven years from now. Medicare currently makes up about twenty percent of federal spending. This is projected to rise dramatically as more baby boomers retire. By 2011, Medicare is projected to pay out more than it takes in unless changes are made.
The trustees note that options are few. One possibility is that Medicare funding must be doubled through higher payroll taxes. Medicare is currently funded by the FICA (Federal Insurance Contributions Act) deduction on your paycheck. The Medicare tax is currently 1.45% from each employee and a matching 1.45% from each employer. Funding could also be increased by raising Medicare premiums or using tax revenues from the general fund.
Another option is cutting benefits. Medicare benefits have been reduced in the past, but this option is politically unpopular. Special interest groups can be expected to strongly oppose any such cuts. Benefits would have to be cut by about 50% to keep Medicare in the black.
If the problems with Medicare can be avoided, the United States will face a similar challenge from Social Security. Social Security also makes up about twenty percent of the federal budget and is also funded through a payroll tax. 6.2% of a worker's wages are deducted for Social Security and are matched by the employer. Again, as baby boomers retire, the Social Security program will pay out more than it takes in and will go broke.
President Bush campaigned on Social Security reform in 2004 and attempted a plan to allow voluntary privatization of Social Security accounts. The plan was demonized by Democrats and special interest groups such as the AARP. These groups were concerned that citizens who depend on Social Security payments would suffer. Others worried that private accounts would be more risky than guaranteed federal payouts.
In truth, the government program is proving to be very risky. Inaction on the part of the government will guarantee that the program goes bankrupt. Guaranteed returns from the government program are a paltry two percent. This is much less than the returns realized in private retirement accounts.
"The fundamental math is inescapable," said Treasury Secretary John Snow, head of the programs' trustees. "Inaction is not a responsible course. The longer we wait the more difficult the decisions will be."