Commentary

Taxpayers should view reform's spending projections with a healthy distrust

by Mitch Pearlstein

What possesses anyone to have any faith whatsoever in any of the projections coming out of the Obama administration and the rest of Washington about what assorted health care proposals may eventually cost?

Putting matters statistically starkly, it's hard to imagine any aspect of government -- heck, make that pretty much the whole of human endeavor -- where smart people have been so hugely and consistently wrong.

In a recent column in Investor's Business Daily, for example, former Sen. Rudy Boschwitz and former U.S. Rep. Tim Penny correctly cited how federal spending on Medicaid totaled $1.8 billion in 1968, but had grown to $190.6 billion in 2007.

1968 was an excruciatingly nasty year with a lot of preoccupying stuff going on, but I don't seem to recall anyone predicting that federal spending on Medicaid (never mind what Minnesota and other states increasingly would pay for the program) would grow 106 times bigger in nominal dollars in less than 40 years.

By a large margin, Medicare is an even bigger federal obligation. What might otherwise smart people -- maybe even brilliant people -- have said about its future costs back in the 1960s, when Medicare got started? Let's start three years before Medicare's 1965 adoption, with what employees and employers envisioned paying for it via increased payroll taxes.

In a Newsweek column in April 1962, columnist Kenneth Crawford reported that Medicare would be financed initially by a one-fourth of 1 percent increase in the Social Security payroll tax, shared equally by employees and employers -- meaning that each would ante up one-eighth of 1 percent more.

A year later, in 1963, the chief actuary for the Social Security Administration, Robert Myers, acknowledged that if hospital costs continued to rise as they had been, the combined payroll tax for funding Medicare would total a full 1 percent by the early 1980s.

That is, 1 percent instead of the one-half of 1 percent that Medicare partisans were then predicting would be adequate, and instead of the one-quarter of 1 percent spoken of just a year earlier in 1962.

It took, not upwards of two decades, but a grand total of two years for the full 1 percent to come about, when President Johnson signed Medicare legislation in 1965.

Still, according to Steve Hayward and Erik Peterson, writing in Reason magazine, framers assumed that a 1 percent tax would be sufficient through 1990, aided by only slight increases in the taxable income base.

Yet by the time Hayward and Peterson wrote their piece (a full 16 years ago now, in 1993), the combined Medicare portion of payroll taxes had already grown to 2.9 percent, and had been there for a spell. This was a disparity of 290 percent over Medicare's original payroll tax. It was more than a 1,100 percent increase over the one-quarter of 1 percent combined payroll tax presumed in Newsweek in 1962.

As for taxable income bases, officials just missed again. What originally had been $6,600 had grown, by 1993, to $135,000.

So much for payroll taxes, which cover only the hospital portion of Medicare. What about total Medicare spending?

Medicare cost $3 billion in 1966. That was it, total. The House Ways and Means Committee at the time estimated that it would cost only $12 billion in 1990, a projection that took the committee's best guess about inflation into account.

Sure, inflation proved steeper than most anyone likely feared at the time. But still, Medicare wound up costing $107 billion in 1990, which was 890 percent more than predicted a sort generation earlier.

Where might Medicare numbers now stand? Taking into account that the drug benefit was adopted only several years ago, here are two current and illustrative sets.

Compared to $3 billion in 1966 and $107 billion in 1990, total Medicare benefits in 2008 came to $462 billion.

And while the Part A payroll tax has held steady for an extended period at a combined 2.9 percent, it now applies not just to the first $135,000 of income, but to all earned income.

Just last week, the Obama administration admitted that its earlier projections about how deep in the red the U.S. government as a whole will go over the next decade had not been deeply blood-red enough.

Is it really plausible that its predictions regarding American health care, and how the president plans on revamping it, might wind up any more on target?

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Mitch Pearlstein is founder and president of Center of the American Experiment in Minneapolis, which describes itself as "a nonpartisan, tax-exempt, public policy and educational institution that brings conservative and free market ideas to bear on the hardest problems facing Minnesota and the nation."