Medicare policy for future generations--a search for a permanent solution. Academic Article uri icon


  • In 1965, Congress allowed an anticipated surge in the working population, generally referred to as the baby boom, to lull it into a false sense of security that a transfer-payment system of financing Medicare would work. As a result, no resources have been set aside to fund the surge in medical care Costs for the retired population that is almost upon us. How different the situation would be now if the original planners of Medicare had remembered the biblical story of Joseph we all learned as children. They would have recognized that the large group they saw entering the labor force in 1965 was similar to the seven years of plenty Joseph foresaw when he interpreted Pharaoh's dream about the seven fat cows and the seven skinny cows. He predicted that seven years of plenty would be followed by seven years of famine. Joseph convinced Pharaoh to put grain aside during the years of plenty in order to feed his subjects during the seven years of famine. In our case, we are still in the years of plenty. The equivalent of the seven years of famine will begin when the baby-boom population begins to leave the labor force. Have we put anything aside to prepare for these years? The answer is no. We are faced with an imminent famine with no reserves in our grain silos. But it is not too late. Converting our current transfer-payment system of financing Medicare to an investment-based system can be accomplished if we act quickly. We can replace Medicare with a fully funded investment system. Such investment will increase the nation's capital stock and help provide the resources necessary to fund the retirement medical care of the baby boomers while at the same time protecting the health care rights of future generations. Our estimates indicate that by using the current implied Medicare-tax rate as a base and moving people 43 or younger to a fully funded system, we can rescue Medicare, Older Americans will remain in the current Medicare system, with their retirement health care paid for by their remaining Medicare tax payments, plus the excess contributions from younger workers, and a transitional payment of about $49 billion per year. That $49 billion, or 2.9 percent of total federal spending this year, could be funded by a dedicated source such as the tobacco settlement or by cuts in other programs, but it is important to remember that this $49 billion is about half the cost increase that the current Medicare system will impose on government. Once the transition is complete, the tax rate will drop to the level necessary to fund retirement health insurance in advance. It is essential that the explosive growth in the cost of Medicare be halted by allowing current beneficiaries to opt into competitive provider systems, thus putting market forces to work controlling Medicare costs. But consumer choice, competition, and efficiency in Medicare are just the beginning. To complete the reform, young and middle-aged workers should have a Medicare system built on sound investment funding. The first steps in achieving this reform are to be honest with the American people about the existing unfunded liability of the current Medicare system and to create a program to protect those who will remain in the system by paying off this unfunded liability. The sooner we begin the restructuring, the less costly it will be. The sooner we begin the reform, the more secure Medicare will be, not just for our parents but also for our children.

published proceedings

  • N Engl J Med

author list (cited authors)

  • Gramm, P., Rettenmaier, A. J., & Saving, T. R.

citation count

  • 4

publication date

  • April 1998