Issue #18, Fall 2010

Attention: Deficit

Should progressives embrace entitlement reform? Or look elsewhere to narrow the gap? An exchange between two leading fiscal experts.

But, in contrast to Sawhill, I believe that reducing Social Security, Medicare, and Medicaid benefits would unnecessarily impose new financial burdens on American families, alienate the public, and fail to address the core problem of soaring health-care costs. To answer her question about whether the ideas I proposed would be sufficient to adequately address looming deficits while allowing for new public investments, the answer is yes–at least until the early 2020s or so. After that point, if medical inflation remains out of control, deficits would start to rise again. But that would be the case even if the social-insurance reductions that Sawhill recommends were implemented. It’s the high rate of growth in health-care costs that’s driving the spiraling deficit projections, not the baseline benefit levels. And as we have seen with past unsuccessful efforts to impose a cap on Medicare fees to doctors, as well as the old Gramm-Rudman-Hollings Act, which futilely tried to keep a lid on federal spending through rigid targets, ceilings don’t work in practice because they cause too much pain to be politically sustainable.

I prioritize universal social-insurance programs so highly because they represent what government does best. By including all citizens in the pool covered by insurance protections, the programs spread risks across the entire population. That feature, along with economies of scale and the absence of a need to earn profits, enables the government to minimize costs relative to private-sector insurance. And, in contrast to means-tested programs like Medicaid and Head Start that struggle perpetually against public hostility, the popularity of social insurance creates a virtuous cycle in which the programs are continually improved over time. In an April New York Times poll, 76 percent of respondents said that “the benefits from government programs such as Social Security and Medicare are worth the costs of those programs,” versus just 19 percent who disagreed. Even among the 18 percent in the sample who said they supported the Tea Party movement, 62 percent concurred with the statement. Trying to impose new forms of means-testing on those programs, as Sawhill suggests she would, risks undercutting that public enthusiasm by moving them in the direction of welfare.

I also question Sawhill’s premise that constraining social-insurance programs will “free up resources to tackle new problems.” I don’t share her optimism; it seems doubtful that the same collection of political actors who would reduce Social Security and Medicare benefits would also simultaneously redirect the money toward something like universal pre-K. On the other hand, the newly enacted health-care legislation, the stimulus bill’s investments, and the creation of the Children’s Health Insurance Program under President Clinton are all examples of tackling problems in fiscally responsible ways without reducing social-insurance protections.

Efforts to cut benefits are frequently predicated on data that seeks to portray retirees as having more financial security than they actually do. Sawhill cites Eugene Steuerle’s claim that the lifetime retirement costs to the government of a typical married couple amount to $900,000. This is the kind of nugget that can create the misleading impression that older Americans are living high off the hog on the backs of workers. It omits the payroll tax contributions retirees made when they were employed and the medical insurance co-payments they owe in their old age. And however one might choose to make this sort of calculation, you can come up with a big number mainly because of high and rapidly rising health-care costs, which disproportionately affect the elderly because they need more medical care.

Again, compared to other countries, Social Security pays only modest benefits. As the Baby Boom generation retires, benefits will go from today’s 4.8 percent of GDP to about 6.2 percent by 2035 and level off thereafter. There’s nothing unaffordable or excessive about that, and the increase has been long anticipated. The 1983 reforms that Ronald Reagan signed into law have already largely sorted out how what he called an “iron-clad commitment” will be met. That agreement entailed raising payroll taxes on the Boomers and younger generations while delaying the retirement age, which already has been raised from 65 to 66 and is scheduled to be gradually increased to 67 over the next dozen years. Reneging on that deal by cutting benefits further now would be simply unfair–and fairness is a cornerstone progressive principle.

All this brings us back us to our hugely inefficient health-care system, which may be the focal point of our debate. Sawhill was rather dismissive of the impact that the health-care legislation will have on medical costs, which is somewhat understandable because so much uncertainty is involved. But it’s worth noting that in the CBO’s newly released long-term “extended baseline” forecast, the 50-year fiscal gap declined from 2.6 percent of GDP in its previous report to 0.8 percent–entirely because of the effects of the health-care legislation. This suggests that caution is in order before taking painful action today.

Sawhill argues that she supports per capita public spending limits on health care because some other advanced countries have instituted caps, and “their citizens are no less healthy or content with their care than those in the United States.” But comparisons with other advanced nations also show that those countries have figured out ways to cover all their citizens at a much lower cost than we do, while generally providing better care. A new report from the Commonwealth Fund, a health-policy institution, examined the U.S. system in relation to six other countries, including Canada and the United Kingdom, and found that the United States “fails to achieve better health outcomes than the other countries, and…is last on dimensions of access, patient safety, coordination, efficiency, and equity.” In that context, placing caps on public health-care spending, without first instituting a national system of universal coverage that would also give the federal government much greater cost-control leverage, will inevitably impose large new financial burdens on the elderly and poor.

Building on the new health-care legislation to implement changes that would elevate the United States from its abysmal international rankings will require a more robust federal role in the system. I have argued previously in Democracy in favor of federalizing Medicaid, in part because that highly decentralized program contributes to the fragmentation that enables rampant cost growth. The health-care reform bill takes important steps in the direction of federalizing Medicaid, but it still relies too heavily on states to carry out regulatory reforms and create insurance exchanges. It will be an ongoing project for decades to come to make our system much more efficient. Throughout the process, the goal for progressives should be to strengthen the rather meager protections Americans now receive. Every other advanced nation has managed to afford universal health care, and the United States can as well.

Sawhill emphasizes that individuals “bear some responsibility for their own future welfare.” No one can disagree with that sentiment. But where would she draw the line? Given payroll taxes that workers have already contributed, at what individual income and/or asset levels should Social Security and Medicare benefits be reduced? Is there another country that might serve as a model for the United States, one that has found the right balance between individual responsibility and governmental protections?

Instead of serving up raw spinach that hardly anyone wants to swallow–for good reason!–progressives should be offering a menu that features more of what once made them popular. Every entrée should also include fiscal responsibility as a side dish, but deficit reduction isn’t the main course.

Sawhill responds: As Greg Anrig notes, he and I agree on many issues, from the need to reform taxes to the importance of spending more on public investments to the centrality of health-care costs in creating a fiscally unsustainable future. Where we disagree is on the most promising ways to constrain future health-care costs, on the right balance between spending cuts and tax increases, and on the relative importance of fiscal responsibility versus other goals.

We both believe that the health-care reform bill should be strengthened in ways that will reduce cost inflation. Anrig mentions a public option and the federalization of Medicaid as possible strategies for achieving this goal. These are promising ideas, but I am not convinced they are sufficient. He dislikes my proposals to cap spending and pay providers based on evidence of effectiveness. The fact is neither of us really knows what will happen to medical costs or what it would take to slow them down. But in the absence of stronger measures than those contained in the recent reform bill, I see nothing that reassures me. In light of four decades of costs rising 2.5 percentage points faster than GDP, I fear that progressives are engaged in wishful thinking about the seriousness of the problem.

Anrig buttresses his own optimism by citing a recent CBO report indicating that under their long-term extended baseline forecast, the 50-year fiscal gap has declined from 2.6 percent of GDP to 0.8 percent, entirely because of health-care reform. (The improvement is primarily due to the excise taxes on high-end plans, which 50 years from now will impose higher taxes on just about everyone.) But this estimate is, by CBO’s own admission, based on a set of very unrealistic assumptions, such as the elimination of all the Bush tax cuts and reductions in doctor’s fees that Congress is unlikely to support. Under CBO’s more realistic “alternative fiscal scenario,” this same gap is 6.9 percent! What this means is that Congress would need to enact an immediate reduction in spending or increase in revenues of about $1 trillion a year to put us on a sustainable course. If all of this money had to be found on the revenue side of the budget, taxes would need to increase by more than a third over current levels. Perhaps even more telling is the fact that CBO is unwilling to assume that health-care reform will have any effect on health-care costs over the long run. (They do expect some one-time savings over the next 20 years.)

One theme of Anrig’s argument is the need to preserve and strengthen Social Security and Medicare–at all costs. My focus is on the costs, on what progressives give up by taking this stance. As I have tried to emphasize, these costs include: first, a loss of confidence in government’s ability to manage its fiscal affairs; second, a crowding out of most other spending, some of it essential to the broad-based prosperity that progressives support; and third, punishing and politically unpopular tax increases for working-age Americans. Anrig argues that people who have paid into the system should receive their promised benefits. Unfortunately, these benefits are no longer affordable without raising taxes to unthinkable levels and increasing the fraction of Medicare expenses that come out of general revenues. My argument is that fairness demands that we balance the needs of senior citizens against the needs of working-age Americans and their children. Is it unfair to expect that future retirees in a household with an income above $75,000 might accept a little less from their government when we are asking working-age households with the same incomes to pay much higher taxes? (Anrig argues that such households are a very small fraction of the elderly. My data sources say they are about 20 percent of all households 65 and over, and I predict they will be a bigger fraction by the time any change in promised benefits is phased in.) Is it fair to cut spending on child-care and job programs for welfare recipients (as California has proposed) in order to preserve programs for those who are living quite comfortably? Progressives should fight for the kind of reallocation of resources toward the less advantaged that both Anrig and I favor. But they should not assume such resources will be available through tax increases and cuts in non-entitlement spending alone. Nor should they be sanguine about the possibility of preserving, much less improving, programs for the poor in the absence of responsible reforms.

We can escape the costs of unfettered growth in social-insurance programs in the short term by tolerating large and growing deficits while keeping our fingers crossed about the consequences. But a day of reckoning may not be far off. Anrig calls fiscal responsibility “a side dish,” not the “main course.” He states: “[A]ccounting prudence is not a cause that in its own right can directly improve the lives of Americans in lasting, concrete ways that generate political excitement and attachments.” Ross Perot and the Tea Party might suggest otherwise. But more importantly, deficits do affect the lives of Americans. Deficits are not bad in and of themselves. They are bad because they adversely affect productivity and living standards, make us dangerously dependent on unfriendly nations, create a serious risk of an economic crisis, and limit what government can do in response to a crisis–whether a financial meltdown, a pandemic flu, or a natural disaster. And though it’s a less tangible cost, I believe that, to many people, deficits are a symptom of a government that no longer works. When government is discredited, only conservatives benefit.

This has been a very useful dialogue, and I have learned a lot in the process. Hopefully, our debate will help other progressives think a bit more clearly about where they stand and catalyze a broader debate beyond these pages.

Anrig responds: Isabel Sawhill nicely encapsulates our central differences when she writes that the costs of preserving and strengthening Social Security and Medicare are “first, a loss of confidence in government’s ability to manage its fiscal affairs; second, a crowding out of most other spending…and third, punishing and politically unpopular tax increases for working-age Americans.”

On the first point, polling data have consistently shown strong public support for Social Security and Medicare, and deep opposition to most forms of proposed benefit reductions like raising the retirement age. That’s true in red, blue, and purple states, across income levels and age groups, and even among anti-government Tea Party supporters. In contrast, public concerns about deficits ebb and flow, largely depending on economic conditions rather than the actual balance between government outlays and revenues at any point in time. Ronald Reagan crushed Walter Mondale in 1984 notwithstanding the large deficits Reagan created, mainly because the economy had significantly improved. Democrats didn’t benefit in 2000 from transforming deficits into surpluses during the previous decade.

Issue #18, Fall 2010
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response: Attention: Deficit:

A few quick points: Baby-boom retirement drain on SS will lessen as we die off. Healthcare public option must pass. Early critics of SS predicted crash in insurance industry. Didn't happen. Seniors working solely for healthcare and deferred benefits can't vacate workplace for juniors to be hired.Yes:raise payroll-tax cap.Yes:Federalize Medicare. State programs can't compete with natl. health ins. cos. Losing trust in govt? Trust big biz more? Wealthy must finance greater good.

Sep 15, 2010, 7:57 PM
Nathar Anayee:

Thank you for the great ideas.
It is hard to seperate the Federal finance from the politic, but if we do! we can get more working space to concentrate on the finance

Mar 19, 2011, 11:58 AM
Randy Johnson:

So far as the definition of S.S. as an "entitalment" and being full of I.O.U.'s these are not entitlements. They were paid into by the people. Also if the politicians would quit giving themselves entitlements, "free healthcare, pensions after one term, etc." the American public would be much more receptive to reduced benefit amounts.

Mar 30, 2013, 11:07 AM

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