Attention: Deficit

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

Anrig responds: It’s clear that Isabel Sawhill and I would have relatively little difficulty reaching agreement on many reforms that would advance progressive goals and strengthen the federal government’s long-term fiscal outlook. We both support greater and more effective investment in early childhood programs, education, and infrastructure; we both advocate overhauling the tax code to produce substantially greater revenues while making the system more fair, efficient, and simple; we both favor streamlining defense spending to eliminate unnecessary, high-cost projects; and we both think that our social safety net is inadequate and needs to be strengthened.

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.

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