Medicare from the Perspective of Generational Accounting

Jagadeesh Gokhale, Laurence J. Kotlikoff

NBER Working Paper No. 6596
Issued in June 1998
NBER Program(s):Monetary Economics, Economic Fluctuations and Growth

U.S. policy changes and more optimistic fiscal forecasts have significantly improved the long-term fiscal prospects of the country. Nevertheless, these prospects remain dismal. Unless U.S. fiscal policy changes by a lot and very soon, our descendants will face rates of lifetime net taxation that are 70 percent higher than those we now face. They will, on average, find themselves paying 1 of every 2 dollars they earn to a local, state, or federal government in net taxes. A number of factors, besides current and projected Medicare spending, are responsible for the imbalance in U.S. generational policy. But the ongoing excessive growth of Medicare benefits is certainly a key culprit. Achieving generational balance solely by cutting Medicare benefits is feasible but would require cutting over two-thirds of the program's expenditures assuming the cuts were made today. If one waits five years before cutting Medicare, four-fifths of the programs would have to be slashed. Clearly, Medicare cuts of this magnitude are unlikely to happen, but however we resolve our sever crisis in U.S. generational policy, it's clear that significant reductions in Medicare spending will be a major part of the story.

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Document Object Identifier (DOI): 10.3386/w6596

Published: Rettenmaier, Andrew J. and Tom Saving (eds.) Medicare Reform: Issues and Answers. University of Chicago Press, 1999.

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