Issue #27, Winter 2013

Progressives and the Safety Net

Conservative extremism has made any talk of entitlement reform verboten on the left. That will ultimately be self-defeating.

Something wonderful happened in the United States during the middle third of the twentieth century. After decades of policies that smacked of Social Darwinism, our country created a strong, if incomplete, social-insurance safety net. The actions our government took expressed a solemn promise to vulnerable Americans. Social Security and Medicare assured the elderly and disabled basic cash income and health care roughly similar to that enjoyed by the rest of the population. They lifted the elderly and disabled from a status of privation to near equality with the nonelderly in both money income and access to health care. Various other federal programs provided food, housing, and educational support, or encouraged their provision by state and local governments. By official measures, poverty among the elderly fell below that of other age groups thanks to Social Security, and health coverage improved markedly for the nonelderly poor because of Medicaid.

Now, in the second decade of the twenty-first century, these advances are under attack and that solemn promise is in jeopardy. To be sure, these programs enjoy enormous popularity. At the same time, however, a solid minority has never accepted the idea that taxes should be used to pay for pensions and health insurance. As long as economic growth generated enough revenue to pay for these programs and the rest of government’s commitments, opponents of social insurance and other elements of the safety net gained little political traction. Three deficit reduction plans enacted during the presidencies of George H.W. Bush and Bill Clinton, along with sustained economic growth, produced budget surpluses in the late 1990s and early 2000s.

But then everything changed, and the national debt ballooned. The recessions of 2001 and 2007-2009 led to higher unemployment and lower revenues. Imprudent tax cuts slashed revenues still more. Wars in Iraq and Afghanistan following the tragedy of 9/11 led to huge increases in military spending. As a result, large and seemingly limitless deficits emerged, and budgetary angst has become epidemic.

In addition, official projections have warned that retiring baby boomers and rapidly rising health-care costs will cause Social Security and Medicare benefits to greatly outpace program revenues. Although these long-term forces have little to do with current budget deficits, they have combined to generate a sense of fiscal crisis. On top of this comes the “fiscal cliff,” the concatenation of dubious fiscal decisions timed to take effect almost simultaneously. The tax cuts enacted during President George W. Bush’s first term and the payroll-tax holiday enacted in early 2011 are set to expire on December 31, 2012. The government debt will soon breach the ceiling set in August 2011. Mindless spending cuts passed in 2011, based on formulas that pay no heed to the relative importance of programs and that have nothing to recommend them other than simplicity, are also to begin on New Year’s Day 2013.

Analysts agree that if all of the tax increases and expenditure cuts take effect, economic activity will slow, and a weak recovery will morph into recession. Failure to raise the debt ceiling would wreak tsunami-like devastation on financial markets that would inundate the rest of the U.S. and world economy.

Against this backdrop, the American public is being told that the cause of looming financial catastrophe is an “entitlement crisis.” Fiscal Jeremiahs warn that the only way to deal effectively with current deficits is to cut back Social Security, Medicare, and Medicaid years in the future. The full House of Representatives has twice passed budget plans, crafted by Budget Committee Chairman Paul Ryan, that would replace Medicare with a voucher that beneficiaries could use to buy either private insurance or a plan like traditional Medicare. The Ryan plan would also convert Medicaid into a block grant at spending levels well below what is projected under current law. The grants would not increase during recessions when Medicaid enrollments tend to spike. States, pinched by falling revenues and rising service demands, would have to cut benefits just when they are most needed.

But while reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget—currently 50 percent of noninterest spending. Furthermore, the phrase “entitlement crisis” has been repeated so often and so earnestly that denying its reality is more likely to damage one’s own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities—the need to secure majority support for measures to lower deficits once economic recovery is well advanced—make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives. To begin this search, one should start with the underlying economic and demographic forces that are driving spending.

Demographics and Entitlements

Three demographic facts are key. Longevity is increasing. In contrast to the past, when life expectancy increased due mostly to declining mortality rates among infants and the young, almost all current and future longevity gains will occur among the old. Large groups of Americans are not sharing in these longevity gains.

Life expectancy has risen throughout most of the industrial era. But the character of that increase has changed profoundly, as documented by Stanford health economists Karen Eggleston and Victor Fuchs in the Journal of Economic Perspectives. For most of history, high infant and early-childhood mortality meant that most babies didn’t live to grow old or even to child-bearing age. Only 40 percent of babies born in 1900 lived to age 65. Mortality before child-bearing age explains why high birth rates led to little or no population growth. In the early and mid-twentieth century, that changed. Major public health and medical advances—notably, improved sanitation and diet, and antibiotics—caused mortality from infectious diseases to plummet. Now, more than 80 percent of babies are expected to live to age 65.

As mortality rates for young adults approach zero, most longevity gains have to occur among the old. As Eggleston and Fuchs show, that is just what has been happening. The share of longevity gains among those over age 65 has risen from one-fifth at the start of the twentieth century to 80 percent now, and the share is rising.

For the past couple of decades, these gains have been unequally shared. Research by University of Illinois at Chicago public health professor S. Jay Olshansky and his co-authors documents that most longevity gains have accrued to the well educated. Those with little education are actually dying younger than they were in the past. A pre-existing longevity gap is expanding with alarming speed. Between 1990 and 2008, life expectancy at age 25 among white men and women with less than a high-school education fell 3.3 years and 5.3 years, respectively. Part of the reason for this drop may well be that those with less-than-high-school education rank lower on the socioeconomic scale now than they did even two decades ago, but much of the shift is a mystery. Among white men and women with at least a college education, life expectancy at age 25 rose 4.7 years and 3.3 years, respectively, over that period. In 1990, life expectancy at age 25 for white men with at least a college education was five years more than it was for those with less than a high-school education; by 2008, the gap was 13.1 years. For white women, the gap shot up from 1.9 years to 10.5 years.

Even at age 65, the relative gaps remain jarringly large. In 2008, for example, white men with a college education or more had life expectancies five years, or 35 percent, longer than those without a high-school education.

As is well known, whites on average live longer than do blacks. That gap has narrowed somewhat over the last two decades. For reasons that are not well understood, Hispanics have longer life expectancies than either non-Hispanic whites or blacks.

Life Expectancy and Public Policy

While differences among groups are important, so too are averages. Half of men are out of the labor force by age 64, half of women by age 62. On average in 2008, life expectancy for 20 year olds was an additional 59 years, or to age 79. That would mean that the average American works 42 or 44 years and is retired for 15 or 17 years (though in reality, most people are not in the labor force all the time). Crunch all these statistics together and you find that, on average, people typically spend roughly one-third of their adult lives in retirement if one accounts for time spent out of the labor force for child-bearing, for education after age 20, and in unemployment. If consumption is spread evenly over the adult life cycle, roughly one-third of lifetime consumption will occur in retirement.

Stanford economist John Shoven points out that most people live as couples. That changes the arithmetic. Males usually marry women somewhat younger and who have somewhat longer life expectancies than themselves. Shoven points out that roughly 30 years will elapse, on average, before both members of a couple consisting of a 62-year-old man married to a 60-year-old woman will die. Typically, they will have worked no more than 40 years. Shoven bluntly asserts, “You can’t finance 30-year retirements with 40-year careers without saving behavior that is distinctly un-American.” Whether one uses my arithmetic or Shoven’s starker version, it is surely fair to ask whether people will be willing to divert from current consumption enough to both support ever-lengthening retirements and pay for the rest of what they want government to do.

Perhaps they will. After all, workers retire earlier in many other developed countries and receive pensions more generous than those in the United States, even though their life expectancies equal or exceed our own. Still, the reaction of U.S. elected officials to current and projected budget deficits suggests that the United States will not readily accept European-level taxes. Europeans are, to be sure, cutting back pension commitments, but they are doing so from levels much higher than those in the United States and facing elderly populations that, relative to total populations, are considerably larger than any anticipated in the United States. The Republican Party wants no tax increases whatsoever. Even most Democrats support permanent extension of most Bush-era tax cuts.

For this reason, supporters of the current social-insurance system—even as they fight against any cuts at all—must think about changes in Social Security, Medicare, and other elements of the social safety net that reduce spending in the least damaging ways and that may accomplish other goals. Prominent among such goals should be measures to put in place financial incentives to “nudge” those who can do so without undue hardship to work until later ages than they now do.

Social Security

Two fundamental facts make the prospect of any cuts in Social Security particularly galling. One, Social Security benefits were cut significantly by 1983 legislation. (The law enacting those cuts is still only partly implemented; more cuts are to come.) Two, U.S. benefits look downright parsimonious when compared against those offered in other developed nations.

The 1983 Social Security Amendments, largely modeled on recommendations of a commission appointed by President Ronald Reagan and Congress and chaired by Alan Greenspan, cut benefits two ways. They skipped a cost-of-living increase for current pensioners and built that reduction into the benefit formula. They also put in place what is perhaps the most widely misunderstood and misnamed legislative provision in all U.S. history, the benefit cut that was misleadingly called an increase in Social Security’s so-called “normal retirement” age—from 65 to 66 starting with those born in 1938 and to 67 starting with people born in 1955.

Despite the name, that change had next to nothing to do with when people normally retire or claim benefits. What Congress actually did was to raise the age at which unreduced benefits—the amount generated by the Social Security benefit formula—are paid. Congress left unchanged the age when people can and, typically, do first claim benefits, age 62. Retirees who claim benefits before the “full-benefits” age receive less than the full benefit. The reduction is 6.67 percent multiplied by how many years before the full-benefits age that people take their pensions. For that reason, raising the age at which unreduced benefits are paid by two years simply cuts benefits for all retirees by just over 13 percent.

The Social Security checks people receive have fallen still more for another reason. Before it mails checks, the Treasury Department subtracts each pensioner’s premiums on Part B of Medicare. Medicare premiums have outpaced pension growth and are expected to continue to do so. Furthermore, taxation of Social Security benefits will also increase as called for by the 1983 amendments. For all these reasons, the ratio of Social Security net take-home pay to earnings has fallen. For a worker with average earnings claiming benefits at age 65, Social Security take-home pay, which was 39 percent of average lifetime earnings in 2002, will fall to 35 percent by 2015 and to 31 percent by 2030.

Not only are Social Security benefits growing more slowly than earnings, they are lower than benefits in most other developed countries. For average earners, U.S. old-age benefits in relation to earnings are 9 percent lower than those of Germany, 30 percent lower than those of France, and 51 percent lower than Denmark’s. Compared to pensions in the 16 economically developed members of the Organization of Economic Cooperation and Development (OECD), U.S. benefits for average earners are 34 percent lower and rank fourteenth. If one takes account not only of the amount paid at a point in time, but also longevity, the ages at which pensions are first available, and other features of pensions systems, U.S. pensions are 40 percent below the OECD average in absolute value, despite our higher average incomes. This mocks allegations that U.S. benefits are lavish or unsustainable.

Issue #27, Winter 2013
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Mr. Gene Ferguson:

I have paid into Medicare befor and after retirment It is my right. Social Security should be made a more liveable income.A large % of us worked with our bodys and are able to work longer.

Dec 10, 2012, 1:21 PM
Heidi Hartmann:

Are the top 30% of Social Security filers really high earners? Averaging $57,000 per year doesn't seem very high on the hog. Such would be early retirees may need to retire, due to unemployment or health problems, and have few other resources besides Social Security. Hank, if you are serious about this proposal, I suggest moving up the income scale to the top 20% at most and exempting those in that group who have small assets or pensions even then (that is, little other income to sustain them). But then as Dean Baker suggests the administrative cost of doing a real means test, one that takes into account other income would be high and eat into the savings. So really this part of your proposal is complicated by the details and therefore I hope a non-starter.

Dec 11, 2012, 5:39 AM
Jeffrey Stewart:

Who the fuck is Henry J. Aaron? Is he going to depend on Medicare for health care in his elderly years? My bet is, "no." The only people calling for cuts in Medicare benefits are the ones who will never need the program for health care, i.e., in order to live.

I'm so sick and goddamn tired of the notion that programs helping the most vulnerable members of society live a dignified life must be cut in return for raising tax rates on wealthy people! That does not compute!

This trade off is in no way "balanced," "fair," "shared sacrifice" or any other euphemism used to disguise cruel cuts to any people who aren't wealthy.


Dec 11, 2012, 12:19 PM
John Creighton Campbell:

This is an excellent piece and I will keep it on hand to send to people. Common sense plus deep knowledge goes a long way. But the discussion at the end of encouraging people to work longer includes the phrase "at full employment." Many seem to be asking now if we will ever have full employment thanks to automation and corporate power. If something like that is true, what are the implications for encouraging longer work lives?

Dec 12, 2012, 3:22 AM

for the last time..we spend 4.5% of our economy on national defense German & Japan 1.5% European welfare state and our defense budget not going to the answer is not to be "like European welfare programs, he answer is to charge the "tax/user fee" to Eure & japan..they need middle eastern oil more han usa does

Dec 12, 2012, 1:20 PM
Steve Schnapp:

Recently published EOCD data on health care expenditures make it clear that health care in the US costs several thousand dollars more per capita than the next highest per capita spender, Norway. Yet our health outcomes are worse (we rank 34th in a combined health & social indicator index). Aaron should take a look at economist Dean Baker on the relationship between out-of-control health care costs and the deficit.

Dec 13, 2012, 10:44 AM
Putnam McDowell:

Good article but I cannot believe that there is any "solid minority" (whatever that means)that continues to oppose use of tax dollars for pensions and health care. I think the author is "crying wolf" on that score.

Putnam McDowell

Dec 14, 2012, 12:15 PM
Evil Overlord:

This is the kind of article that drives many people crazy. It pretends to be a balanced, objective look at entitlements, but rejects (and pretends to misunderstand) even such basic changes as raising the retirement age. Aaron claims it's not a retirement age, but the age at which full benefits - as if raising that age will have no impact on when people actually retire.

The article even seems to suggest spending more money on some aspects of entitlement - as if living longer should entitle you to a higher pension.

The Republicans maybe foolishly tone deaf on taxes, but Democrats are just as foolish on entitlements. I'd hope progressives would be more realistic.

Dec 17, 2012, 10:25 AM
Harris Meyer:

Dr. Aaron gets a lot right in this article but what he doesn't acknowledge is the powerful force of age discrimination that makes it difficult or impossible for many Americans in their 50s, 60s, and 70s to continue working in jobs with decent pay and benefits. A lot of folks in this age bracket would LIKE to keep working but either are laid off or can't get hired. What's the solution to that?

Jan 6, 2013, 11:15 PM
David Perel:

Why not allow Medicare to sell competitively priced policies to individuals under age 65? This would expand its asset pool in relation to its liability pool and thereby reduce its drag on future federal budgets. It would also give consumers greater choice.

Jan 8, 2013, 2:55 PM
David Perel:

Why not allow people under 65 to buy a Medicare policy that would be priced competitively AND allow Medicare to make a profit. Medicare's added assets would expand relative to its added liabilities.

Jan 8, 2013, 2:57 PM

"I have paid into Medicare befor and after retirment It is my right. "

You didn't pay in enough. The baby boomer generation skated by their prime earning years with historically low taxes, and now demand the rest of us pay for their lack of foresight. You paid for the medical care of 1995.

Frankly, it comes down to not being able to afford everything. If we pay for the $4000/night hospitals, maybe we shouldn't. If we pay for the $30,000 new drugs that haven't even been fully proven, maybe we shouldn't. If we approve every use of government insurance money without question, maybe we shouldn't.

There are lots of ways to save money, but don't tell me that because you paid in 1.57% of your income in Medicare taxes that you are entitled to $10M in care. The math doesn't work.

Jan 23, 2013, 12:18 AM
Mark Jamison:

All the demographics is just a smoke screen and when Progressives let the conversation turn in that direction they lose the battle by ceding the terms of discussion.
First, Social Security needs a few tweaks but is basically fine. It can pay full benefits until 2035 and 75% thereafter. Raising the income cap limits and adjusting the benefit formulas so people who need it most do a little better while those at the top do a little worse ought to be enough to make the program sustainable for the foreseeable future.
The problem is not Medicare but medical costs. Americans pay twice as much per capita in medical costs as those in other wealth nations. Our patent system grants drug companies profits of $290 billion a year on drugs that cost $30 billion to produce.
Medicare does not allow people to travel to foreign countries for care, meaning no free trade in medical costs. Yet countries like Thailand do procedures like bypass surgery at a fourth of the cost of the U.S. and with outcomes that are better.
The economist Dean Baker has written extensively about how our medical costs are out of line and has offered some reasonable proposals on how we could fix that. The fact is that if we had medical costs in line with other wealthy countries our current deficits would disappear.
The demographic argument is designed to invoke generational warfare. That's not to say that demographics aren't a factor but they aren't the primary consideration. A public option, pay for performance and outcomes rather than procedures, and patent reform would do better at addressing the issues that confront us. The Right wants to keep this argument on its current turf because it's an argument that actually undermines the premise of a safety net. Progressives shouldn't fall for that.

Jan 30, 2013, 3:21 PM
Kay Boger:

It is interesting that the only entitlements that are targeted and discussed are for the non-wealthy. Corporate welfare/entitlements cost us all more than any of us can envision.

Congress is paid by corporate lobbyist who then approve even more entitlements to the rich and shameless while touting cuts to the poor.

Feb 6, 2013, 10:37 PM

Social Security benefits have been cut and are too low, but we should just accept that they must be cut further? That's just dumb defeatism.

Raise the FICA, to preserve scheduled benefits, and offset the increase on each paycheck with an income tax credit, penny for penny. I want to see Nordquist complain about an income tax cut (because it would apply only to wages under the earnings cap and would be merely revenue-neutral).

Feb 9, 2013, 3:32 PM

Good post and discussion.

Mar 30, 2013, 11:05 AM

Good and informative discussion..

Apr 23, 2013, 6:12 PM

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