Medicare and Budget Surpluses:

GAO's Perspective on the President's Proposal and the Need for Reform

T-AIMD/HEHS-99-113: Published: Mar 10, 1999. Publicly Released: Mar 10, 1999.

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Pursuant to a congressional request, GAO discussed the President's recent proposal for addressing Medicare and use of the projected budget surpluses over the next 15 years, focusing on: (1) the overall fiscal consequences of the proposal; (2) what it does and does not do for the Medicare Program; and (3) the importance of and difficulty in making fundamental changes to the program.

GAO noted that: (1) the President's proposal would significantly reduce debt held by the public from current levels, thereby also reducing net interest costs, raising national savings, and contributing to future economic growth; (2) it provides a grant of a new set of Treasury securities for the Medicare Hospital Insurance (HI) program which would extend the life of the HI trust fund from 2008 to 2020; (3) it is important to note that these new Treasury securities would constitute a new unearned claim on general funds for the HI program--a marked break with the payroll tax-based financing structure of the program; (4) this would be a significant change that could serve to undermine the remaining fiscal discipline associated with the self-financing trust fund concept; (5) the proposal has no effect on the current and projected cash-flow deficits that have faced the HI program since 1992--deficits that taxpayers will continue to finance through higher taxes, lower spending elsewhere or lower paydowns of publicly held debt than the baseline; (6) importantly, the President's proposal would not provide any new funds to pay for medical services; (7) it does not include any meaningful program reform that would slow spending growth in the HI program; (8) in fact, the transfer of these new Treasury securities to the HI program could very well serve to reduce the sense of urgency for reform; (9) at the same time, it could strengthen pressure to expand Medicare benefits in a program that is fundamentally unsustainable in its present form; (10) the current Medicare program is both economically and fiscally unsustainable; (11) the program's continued growth threatens to crowd out other spending and economic activity of value to the society; (12) even if the entire surplus is saved, Medicare is projected to more than double its share of the economy by 2050; (13) meaningful reform of this program is urgently needed and such reform will require hard choices; (14) the program changes enacted in 1997 illustrate how difficult even incremental reform is to adopt; (15) major change requires reshaping the nation's perspective on health care consumption and drawing distinctions between what the nation needs, wants, and can afford both at the national and individual level; (16) to be effective and sustainable, reforms must begin soon and be comprehensive in nature; and (17) such reforms must be introduced gradually after widespread public education in order to garner sufficient support from the system's multiple stakeholders.

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