Page last updated at 08:58 GMT, Wednesday, 13 May 2009 09:58 UK

US Medicare funding under threat

By Steve Schifferes
Economics reporter, BBC News

Senior exercise class in Palm Springs
Social security provides vital income for many senior citizens

The US social security and Medicare system, which provide pensions and health care for older people,are set to run out of money sooner than expected.

New estimates show that the Medicare trust fund, which pays for hospital care, will run out of money by 2017, and is already running at a deficit.

Social security funds for pensions will be exhausted by 2037, four years earlier than previously projected.

The news will increase the urgency of the need for health care reform.

The costs of these two government entitlement programmes has already reached $1 trillion (tn), or one-third of the entire Federal budget, and is expected to rise significantly as 80 million "baby boomers" reach retirement age over the next two decades.

The rising cost of providing health care - which is growing much faster than the overall growth rate of the economy - is also putting pressure on the Medicare budget.

Both Social Security and Medicare are funded by a tax taken from wages which is paid by workers and their employers, and the money raised is put into a trust fund that is supposed to build up a surplus big enough to pay all future claims.

The weaker economy, with more people out of work, has also reduced the payments received by the funds.

Currently 51 million people receive social security benefits, and 45.2 million are covered by Medicare.

The fund's trustees project an increase of 30% in the number of Medicare beneficiaries, to 58 million, in the next two decades, but also an increase of 50% in the average cost of health care for each person insured.

Urgent reforms

US baby - file photo
Will the next generation of baby boomers be covered?

President Obama has already signalled that containing health care costs, as well as expanding coverage to the 15% of the population that is uninsured, is one of his top priorities.

His Treasury Secretary, Timothy Geithner, said that the only way to make the system solvent in the future was "to control runaway growth in both public and private health care expenditures".

There is bipartisan support for the effort to contain health care costs.

"We need to act now to address Medicare's fiscal sustainability," said Senator Charles Grassley, the leading Republican on the Senate Finance Committee, which oversees Medicare.

But there is less agreement on the overall approach to health care reform.

Senator Grassley attacked proposals by the Obama administration for a Federal-run health insurance plan to be made available to the uninsured in competition with private plans.

Meanwhile, some leading budget experts have suggested that in order to fund reform, health benefits paid by employers (which is the way most Americans receive their health care) should be taxable - something proposed by John McCain in the election campaign.

"I don't see how you can put a package together... unless you touch the exclusions," said Robert Greenstein, director of the Center on Budget and Policy Priorities.

But other experts argue that ultimately, funding Medicare is going to require significant increases in payroll taxes.

"There is no way to balance Medicare without significant increases in taxes," said Henry Aaron of the Brookings Institution.

With the Federal budget deficit already projected to reach $1.7tn this year, and President Obama having pledged to cut the deficit by half by the end of his first term, entitlement reform could become the biggest political issue of his administration.

Print Sponsor

The BBC is not responsible for the content of external internet sites

Heritage Foundation Time to Get Serious (Again) About Medicare Reform - 9 hrs ago Social Security, Medicare and reform - 23 hrs ago
Hematology & Oncology News (5/13) Trustees report Social Security and Medicare programs worsen - 24 hrs ago
Hartford Courant Social Security, Medicare Dwindling In Recession - 26 hrs ago
Portland Tribune Recession hurts Medicare and Social Security - 27 hrs ago

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Sign in

BBC navigation

Copyright © 2020 BBC. The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific