The Medicare Ponzi Scheme

Posted: May 20, 2009 12:01 AM

Isn't it high time America did less for the elderly? A politically incorrect question for sure. But Medicare has an astounding $34-trillion unfunded liability. And because of rising unemployment, its hospital-stay program will go broke two years earlier than previously predicted.

For my recent ABC special "You Can't Even Talk About It", I spoke with residents of La Posada, a development in Florida that made Forbes's list of top 10 "ritzy" retirement communities. These folks are well off. And they get a bonus: You pay for most of their health care under Medicare.

The retirees love it. Everyone likes getting free stuff. And Medicare often makes going to the doctor just about free.

Why is this a good thing?

"What about those young people [who pick up the tab]? What kind of legacy are we leaving for them?" asks Harvard Business School Professor Regina Herzlinger. "We're really stealing from them."

Some high-school students are alarmed about the scam. "20/20" interviewed a group that is willing to help needy seniors -- they volunteer at a food bank -- but they are angry that Medicare forces them to pay for even wealthy seniors.

"This program, Medicare, is essentially ripping my generation off," Zach Hadaway said.

Policy experts say the kids are right.

"The government spends around $6 on seniors for every dollar it spends on children, and yet the poverty rate among children is far higher," said Andrew Biggs of the American Enterprise Institute (

The federal government stiffs the young in favor of the old.

So I told the La Posada seniors that the kids called them "greedy geezers." They said, "We've paid our dues." Money was taken from every paycheck they earned.

But, in fact, the average Medicare beneficiary today collects two to three times more money than he paid in.

"I would argue that this is not only unfair, it's downright immoral," says billionaire Pete Peterson.

Peterson is a rarity: a senior who decided he cannot in good conscience accept Medicare. He and his foundation ( worry about the looming fiscal disaster. When Medicare began in 1965, six working-aged people paid for each Medicare recipient. Now the figure is four. It will get worse as baby boomers like me retire.

Medicare is unsustainable.

"There is $34 trillion sitting off the balance sheet, waiting for future generations to pay," Herzlinger said.

That's how much more Medicare money government has promised than it has budgeted. It's the price of about 30 Iraq Wars.

We locked up Bernie Madoff for running a Ponzi scheme. Medicare is a bigger one. Seniors think the money deducted from their paychecks was stored in a trust fund. But, in fact, it was spent immediately. The "trust fund" is an accounting gimmick.

The giant seniors' lobbying group, AARP (, rarely talks about Medicare's coming bankruptcy, and it rejects reforms like means-testing or raising the eligibility age, claiming most problems can be solved simply by lowering health-care costs.

"Do things like make better use of health information technology," David Certner, AARP's director of legislative policy, told me.

The Congressional Budget Office says such reforms won't save much money.

"Well, they're going to have to," Certner said.

That sounds like wishful thinking -- not unusual among powerful lobbies that ignore basic economics. When something is free for one group, demand runs wild, pushing up prices for those who must pay for themselves and the subsidized group.

On top of that, the demographic problem Peterson emphasizes won't go away, no matter how cleverly the "fix health care" argument tries to bury it. Fewer workers per retiree means shrinking Medicare tax revenues -- period -- even if health-care costs are flat.

"Ultimately, somebody's going to have to give up some medical treatment they'd been getting," Peterson says.

Our group of seniors had second thoughts after we spoke. "I hear what the kids are saying," a man said, "When they get to be our age, there may not be any Medicare."

"Tell them to change the law," one said. "If the kids can get the votes, then they can get it done."

Fat chance. The elderly vote on Medicare.

Most young people don't even know they're getting ripped off.