Research Paper on Medicare's Long-Term Shortfalls

Paper Type:  Research paper
Pages:  6
Wordcount:  1471 Words
Date:  2022-05-26


Fiscal policy is the means that a government uses to adjust the tax rates and its spending levels with the aim of monitoring and influencing the economy of the nation. Fiscal policy is a sister approach to monetary policy. Monetary policy is a means that is used by the central bank to influence the money supply in a country. Both the fiscal and monetary policies are often used together to direct the economy goals of a country. As such, fiscal policy is essentially the use of tax policy and government spending to influence the direction and the path of the economy of a country over time. There are two types of fiscal policies - expansionary fiscal policy and contractionary fiscal policy (Hansen, Pg. 5). The expansionary fiscal policy takes place when the Congress resolves to increase the government spending or cut the tax rate. This resolve results in the shifting of the aggregate demand curve to the right. On the other hand, the contractionary fiscal policy takes place when the Congress resolves to cut the government spending or raise the tax rates (McConnell, Pg. 208). This renders aggregate demand curve shifted to the left.

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Fiscal policy demonstrates that the government can and does influence the macroeconomic production levels of an economy by altering public spending and tax levels (Hansen, Pg. 5). In turn, this influence curbs inflation maintains an appropriate and healthy value for money and increases employment. Fiscal policy works on the idea of finding and striking a balance between government spending and tax rates (McConnell, Pg. 209). For instance, lowering taxes or increasing spending with the aim of stimulating a stagnant economy runs the long run risk of raising inflation. Increased money supply in the economy coupled with an increased consumer demand can lead to the loss of value of money. Goods and services that have not changed in the value end up requiring more money to purchase. However, the real world does not provide the aggregate demand and supply to always move neatly together, more so in the short run. The aggregate demand may grow slower than the aggregate supply or may decline to grow altogether and cause a recession. This occurrence can be caused by various reasons such as the hesitation of households to consume, the decision by firms not to invest as much, or the diminishing of exports. Additionally, the increase in aggregate demand could exceed the increases in the aggregate supply and cause an inflationary increase in prices. Business cycles of boom and recession are the consequences of the shifts in aggregate demand and supply. As these take place, the government may opt to use employ fiscal policy to deal with the difference (Hansen, Pg. 6).

The effects of fiscal policy are different to different people. Depending on the goals and objectives of the policy makers and political orientations, tax cuts could only affect the middle class, the typically largest group of an economy's population. In times of rising taxation and economic decline, it is the middle-class dwellers that are befallen by more taxes compared to their wealthier counterparts. One of the biggest concerns facing policymakers is determining how much the government should be involved in economy matters. There have been numerous degrees of government interference in the economy over the years. For the most part, however, it is important for the government to be involved in the sustainment of a vibrant economy.

The Problem of the Social Security and Medicare Shortfalls and Existing Options to Solve Them

Social Security is the largest single item in the federal budget. It is estimated that in the year 2019, Social Security will cost $1.046 trillion (Amadeo, Pg. 2). The problem at Social Security that needs fixing is the drying of the trust fund in approximately one and a half decades into the future. Currently, workers in the US pay into the Social Security system from their earnings a payroll tax of 6.2%. Employers pump into the system an additional 6.2%. Self-employed people pay both the payroll tax and the employers' tax - the entire 12.4% (Editorial, Pg. 2). In the past, money in the Social Security system has been coming in more than it has been going out. The surplus has been going into a Trust fund. This trust fund is invested in Treasury securities of a special kind. The interest earned on the securities bloats the fund, and so does a tax on the benefits for some of the beneficiaries. However, people are nowadays living longer as compared to the past. Additionally, fewer workers are available to support them hence the money that comes in from the payroll tax is no longer sufficient to cater for full benefits.

Since the year 2010, the administration of Social Security has been utilizing the interest on securities to cater for the shortfall. Without an appropriate fix soon, it will be inevitable for the system to start redeeming the securities by the year 2020 and eventually drying up the fund in less than two decades (Editorial, Pg. 2). By then, tax on benefits and payroll taxes will not be able to cover for a full quarter of the full benefit. This problem can be fixed in some ways such as: raising the full retirement age, raising the earnings cap, tweaking the benefits formula, adjusting the calculation of the cost of living, reviewing the payroll taxes upwards, and increasing the benefits of a section of the population.

Just like Social Security, Medicare caters to the financial security of retirees. The problem with Medicare is essentially the same as the one with Social Security - long-term financing shortfall. Medicare is funded by the taxes that are collected from workers, and two trust funds. The trust funds are the Hospital Insurance Trust Fund (HI) and the Supplemental Medical Insurance Trust Fund (SMI). HI Trust Fund supports part A of Medicare - hospitalization, care at skilled nursing facilities, home health care services after hospital stays, and hospice care for the seniors and the disabled. The SMI Trust Fund caters for Parts B and D of Medicare - care from physicians, home health care, outpatient facilities, prescription drugs and other health and care services for the seniors and the disabled who are voluntarily registered in Parts B and D (Hansen, Pg. 2).

According to the Trustees, the HI Trust Fund will have depleted by the year 2029. By then, the ongoing tax collections from employees will be able to cater for approximately 88% of the HI benefits (Hansen, Pg. 2). If the Congress lets the HT Trust Fund to get depleted, the benefits of Medicare Part A will have to be reduced accordingly. According to the Trustees, the SMI Trust Fund is bound to remain adequately funded till indefinitely. This is because the current laws provide its financing from both premiums that retirees pay annually for the following year's expected costs and the revenues from the general federal tax. However, the costs of SMI are predicted to grow to grow by about 3.4% of GDP by the year 2037, and continue increasing but slowly to 3.7% of GDP by the year 2091 (Hansen, Pg. 2). Approximately three-quarters of the costs will be catered for by the general tax revenues, and the other quarter by premium beneficiaries and retirees. Medicare's long-term shortfalls can be managed and contained by increasing payroll taxes, increasing income taxes, increasing beneficiaries' and retirees' premiums, increasing beneficiaries' and retirees' deductibles and co-payments, improving the efficiency of the system, and improving the beneficiaries' and retirees' health.

Best Option/Options That the Government Should Select to Resolve This Problem

In my opinion, the best option to combat the eventual shortfall in Medicare is changing the eating habits and lifestyles to healthier ones. Unhealthy lifestyles and behaviours are the core reason for chronic diseases. It is about time that people stopped stuffing their faces with calories, get on sustainable exercise regimens, and stop smoking. But since there will always be medical care needs for the disabled, the seniors and the general population, and the need to secure the needs of the retirees, the best option for the Social Security and Medicare systems is to review both the income and payroll taxes upwards. These two options combined will ensure both reduced cost growths and increased revenues and render the systems able to pay out benefits that are expected to owe in the future.

Works Cited

"Editorial: No Numbers, Big Problem: Social Security Slipshod." Pittsburgh Tribune Review (PA), 04 Mar. 2017. EBSCOhost,

Hansen, Alvin H. Fiscal Policy & Business Cycles. Hoboken: Taylor and Francis, 2013. Internet resource.Amadeo, Kimberly. Current Mandatory Spending. The Federal Programs That Are Eating the Budget Alive. 16 Feb. 2018.

McConnell, Campel R. Selected Material from Economics 17: With Study Guide. Boston, Mass: McGraw Hill Learning Solutions, 2008. Print.

Vernon, Steve, Medicare Funding: Problems and Solutions, (2017).

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Research Paper on Medicare's Long-Term Shortfalls. (2022, May 26). Retrieved from

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