Alice Rivlin

In defense of Paul Ryan's Medicare plan

April 7, 2011: 11:14 AM ET

The House budget chairman's vision of bringing the market to Medicare isn't perfect, but it's the best choice in a world of poor alternatives.

Paul Ryan

House budget director Paul Ryan has a radical plan.

FORTUNE -- By far the most significant -- and revolutionary -- proposal in Congressman Paul Ryan's 2012 budget is its blueprint for taming Medicare. According to the Congressional Budget Office's analysis, issued on April 5th, the Ryan plan would totally reverse the course of recent fiscal history by lowering federal health care spending from 8% of GDP today to just 5% by 2050. If we remain on the current course, the spending would jump to 14% in that time frame.

The centerpiece of the Ryan manifesto is the radical new math it applies to Medicare benefits. In short, Ryan (R-Wis), chairman of the House Budget Committee, would transform the program for Americans ages 65 and older from an open-ended entitlement that threatens to swamp the budget into a system that makes fixed payments to participants each year -- payments that would rise at a predetermined, predictable rate. In concept, it's similar to the defined contribution plans most Americans now depend on for retirement: The government would provide a set dollar payment towards your health care premium, and you'd cover the balance of your health care costs, just as most Americans need to take extra savings from their paychecks for retirement.

But while you can pretty well predict what your 401K will be worth in 30 years if you invest conservatively, the outlook for tomorrow's Medicare enrollees is far less predictable. The Ryan budget tells us how fast federal spending on Medicare will rise -- far more slowly than in the past -- but can't predict how high our medical costs will be 20 years from now, and since the government's contribution would be capped, how much of those costs we'll need to pay for ourselves. More

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