As expected, the annual report from the Medicare and Social Security trustees released today shows severe projected shortfalls for both programs. The Medicare Hospital Insurance Trust Fund is projected to be exhausted in 2019, seven years earlier than reported last year. The Social Security Trust Fund would not be exhausted until 2042, the same date as projected last year. The facts are clear: the ill-advised move toward greater privatization of Medicare – the centerpiece of the new Medicare law President Bush enacted last year – has threatened the long term stability of the program. Similar privatization schemes from the administration will eventually devastate Social Security as well.
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Privatization increases rather than decreases Medicare costs and worsens the program's financial outlook. Medicare used to reflect the balance between private insurers' need for profits and Medicare's desire for efficient services by paying private health plans 95 percent of Medicare's costs. The private plans broke their end of the bargain and fled the program. Now the new Medicare law gives in to the private plans' demands, removing any pretense of privatization saving money.
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The new Medicare law accounts for two years of the seven-year shortening of the Medicare trust fund's solvency. The new law alone is as big a factor in the deterioration of the Medicare trust fund as the combined effects of lower tax revenues and higher spending.
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The new Medicare law dramatically increases payments to private health insurers. The new Medicare law has already increased overpayments to private insurers to 107 percent and may eventually lead to overpayments of 125 percent or more. The Congressional Budget Office said private insurance companies would gain an additional $14 billion from the new law, while the White House estimated they would gain $46 billion over the next 10 years.
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Medicare's cost for beneficiaries in private plans will be substantially higher than the cost of those beneficiaries in traditional Medicare. The drive to lure seniors out of traditional Medicare and into private health plans will result in the deterioration of the Medicare trust fund and raise costs substantially for seniors.
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Privatization threatens Social Security solvency. President Bush's Commission to Strengthen Social Security put forth in 2001 calls for workers to invest part of their paychecks in individual accounts. But taxpayers will have to pick up the tab for the lost revenue to Social Security.
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Social Security privatization is estimated to cost $3.1 trillion. Massachussetts Institute of Technology Professor Peter Diamond, together with Brookings' Peter Orszag, estimated the president's plan would total $3.1 trillion in 2001 dollars, if up to 2.5 of payroll were allowed to be invested in private accounts.
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Under the president's plan individual account holders would have to start paying fees to private management companies for handling their money. Average fees of 1.4 percent of assets each year are typical. Dean Baker, co-director of the Center for Economic and Policy Research, estimates that for a worker who placed $1,000 in an account every year for 40 years this would quickly surpass $20,000 in lost savings for the worker. If President Bush has his way, and Social Security is privatized, its price tag will also skyrocket.
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Medicare and Social Security are enormously successful programs that should not be radically altered for ideological purposes. Generations of Americans rely on these programs for their current and future retirement needs. Radical changes, such as privatization, are likely to increase taxpayers' costs and undermine the guarantees Medicare and Social Security are supposed to provide.