Medicare sustainability | American civics | US government and civics | Khan Academy


Voiceover: When we learned about
Social Security, we saw that the people who are currently working
are paying their FICA taxes. Essentially those revenues are
being used directly to provide the Social Security benefits for existing
retirees and other beneficiaries. Any surplus goes to the
Social Security Trust. When you had this baby boomer
generation, on the left hand side of this system right here. The baby boomer generation is this huge
population boom that happened after World War II after the country was happy
and all the soldiers had come back. They produced a lot of babies. You get this population boom. When this population boom was on
the left hand side of the system, they were able to generate a lot of
revenue to supply for the benefits for essentially their parents’ generation. That did help build the surplus. The problem is is that they didn’t
produce; the population did not grow as much in the next generation. You could view that as a
problem or a good thing. It’s a problem in the context of Social
Security because starting recently, and over the next few decades,
this baby boom generation is going to move onto the right
hand side of this equation. We saw that they will start to draw
down even this surplus fairly soon. Because of this demographic
change, the Social Security surplus will be completey depleted
between 2030 and 2040. Medicare is very similar. You have some portion of the
FICA tax is for Medicare. That revenue is used to pay for the
health benefits of the retirees. Any surplus goes into a Medicare trust. That Medicare trust, the formal name
is the Hospital Insurance Trust Fund. The problem with Medicare is
that the situation is even worse. The Medicare trust, or we could
say the Medicare system is
already running at a deficit meaning that they’re spending
more money on the right than
they’re getting in on the left. They’re already starting to draw down, already starting to draw down their trust. Social Security, at least the trust
is continuing to grow until 2023. That’s our best estimate right
now; then it’ll start drawing down. It’ll get depleted between 2030 and 2040. In Medicare, the situation’s a lot worse. In Medicare, we are already
starting to draw down the trust. We are already spending more on
beneficiaries than we are taking down; than we were taking in FICA revenues. The entire trust, based on our
current assumptions, will probably be depleted in the next ten
years; depleted in next ten years. What makes Medicare especially
troubling, despite the fact that it’s in a worse financial position, is that
these costs are growing even faster. I want to be clear. A lot of people think that the …. For Social Security, the main
problem with this system over here is the demographic changes. You have this huge population
that’s retiring, the baby boomers, which makes this not sustainable. With Medicare, that’s also going on. What makes Medicare even a bigger
problem than Social Security is above and beyond those
demographic changes, above and beyond these … this baby boomer
generation retiring, instead of paying into Medicare,
taking benefits from Medicare, the big problem is that you actually
have medical health care costs For Social Security, these people’s
benefits could just go up with inflation. For Social Security, these people’s
benefits could just go up with inflation.
For Social Security, these people’s
benefits could just go up with inflation. For Medicare, the benefits go up
with the cost of medical care. That’s going well above
the cost of inflation. You have the situation where, based on
current benefits, and our best assumptions about the economy and the FICA taxes
coming in, you have a reality where if you had to give the current benefits,
and if you expect medical costs, health care costs to continue to
increase at the rate they’re doing, and there’s no sign frankly that
it is stopping, then you have this reality that Medicare left
unchecked could; right now it’s roughly about 23 percent of our budget,
23-24 percent of our budget, or about four percent of our GDP. Here we are in 2011. It’s about four percent of our GDP
we’re spending on Medicare and Medicaid. Medicaid is essentially health
benefits for mainly the poor. It’s run by the states, but
it gets federal funding. Right now, that’s four percent of GDP. Because of the cost growth in health
care costs, if we leave it completely unchecked over the next 50-60 years, it
could grow to 15-16-17 percent of GDP. Just to be clear, that’s
the percentage of GDP that’s roughly our entire federal budget. This has a potential, if we don’t
grow our budget any, to acutally crowd out a lot of other things. Just to understand this graph a
little bit, they show the part and the cost of Medicare, the part of the
growth due to different things. This is the effect of aging population. This is the effect of excess cost growth. This is the interaction of the two. To understand why that makes
sense, you just have to think about the total cost being
the product of the number. Maybe you could say the
net number of recipients. Some people are paying in as well. This will hopefully help you
understand what I’m talking about. Number of recipients, times
the cost per recipient. Let’s say that this is
the cost per recipient. Cost per recipient, cost per recipient. If you take the number of recipients
times the cost per recipient, you’re going to get the total cost. Let’s say that’s the total cost today. That would be the area of that square. We’re just multiplying the base
times the height, current costs. Current annual cost, current cost. Because of demographic changes,
you’re going to have some increase in the net number of recipients. You’re going to have some increase there. Because of medical cost growth,
you’re going to have a big increase in the cost per recipient. This thing is going to increase much more. If you go to some future point,
and you can pick your future point. I’m really just trying to
make you understand why we have these three categories. The total cost is going to be
the total cost per recipient , that has grown dramatically, times
the total number of recipients. Now you’re talking about this area. This area is going to be the total cost. If you think about how much of
this total cost is due purely
to the increased cost growth, it would be this part right over here. This part would be the amount,
the cost, the increase in the area purely due to the increased cost growth. That would be this part of
the graph right over here. What part of this increased
area is due purely to the increased number of recipients? That would be this part of the graph right
over here purely due to the increased number of recipients. That is right over here,
effect of aging population. You have some part of this
area that’s created by both the increase in the number of
recipients and the increase in cost. That’s going to be this area
right over here, which is this part of the graph. When people talk about the unsustainable
… one we have an unsustainable debt to begin with. The second thing is is that the
liabilities, the obligations that we have aren’t even counted in
the government deficit. These are the things that
are really, really scary. Something has to give. In all of this, the single
factor that’s driving most of the scariness is
Medicare in particular. Not just Medicare, but it’s not
just the demographic changes, but specific to Medicare it’s
the increased cost of healthcare. If somehow that nut can be cracked, if
healthcare can all of a sudden grow maybe just with inflation, or maybe even
slightly faster than inflation, but not at the rate
it’s growing right now. Then you could, to a large degree,
mitigate the scariness of what’s going on with our obligations.

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