Medicare’s $90 Trillion Unfunded Liability

According to Michael D. Tanner of the Cato Institute, Medicare's future unfunded liabilities could be as much as $90 trillion (yes that's trillion with a T). For perspective, $90 trillion is greater than worldwide GDP for 2011.

From Tanner's article:

Let's try to put the ongoing debate over the future of Medicare into a little bit of context. Last year, Americans paid $274 billion in Medicare taxes and premiums. At the same time, the program paid out $564 billion in benefits. That amounts to a shortfall of roughly $290 billion. Looking into the future, even the most optimistic estimate by the program's trustees puts Medicare's future unfunded liabilities at more than $38.6 trillion. More realistic projections suggest the shortfall could easily top $90 trillion.

With such astronomical unfunded Medicare liabilities, don't be surprised if politicians start debating whether or not to increase the Medicare tax rate (1.45% for 2012) in the not so distant future.

Payroll taxes only cover 35% of the costs of Medicare!

The majority of the cost of Medicare is paid by general revenues of the federal government and not by taxpayers paying payroll taxes.

Donald Marron at the Tax Policy Center has recently posted a very interesting piece about the portion of 2010 Medicare costs paid for out of the payroll tax.

His key findings from the Congressional Budget Office 2010 data:

• Payroll taxes covered only 35% of Medicare costs in 2010.
• Payroll taxes covered more than 93% of Social Security's costs in 2010.

The balance of the Medicare cost is covered by user premiums (13%) and general federal revenues (53%).

Marron describes the difference between Social Security and Medicare:

"The difference between the two programs exists because payroll taxes finance almost all of Social Security, but only one part of Medicare, the Part A program for hospital insurance. Parts B and D (doctors and prescription drugs) don't get payroll revenues; instead, they are covered by premiums and general revenues. But that distinction often gets lost in public discussion of Medicare financing."

Very interesting stuff from the Tax Policy Center!