Transcript
Debate and Panel Discussion: Go to transcript for Question and Anwswer Session
Michael Armacost: Good morning, everybody. I'm Mike Armacost. It's my pleasure to welcome you to this fourth in a series of national issues forums focusing on questions that we at Brookings hope will be at the center of the discussion between the presidential candidates between now and the fall. And we began with a discussion on race issues in January. We've had to subsequent discussions, one on governance issues, one on safety net questions. And this morning we're taking up challenges in aging population. And, of course, some of those issues have been prominent in the debate today on social insurance and health care. There were a number of other issues that will flow from the inexorable aging of our population, and we have a welcome opportunity this morning to get into those.
Before I introduce our moderator, let me simply say the format of the program this morning, as it was conceived, was designed to allow a spokesman for the Bush and the Gore campaigns to outline some of the thinking of Governor Bush and Vice President Gore, and then to have a discussion, including some of our own people and others around town who devote their waking hours to these issues. We're delighted that Glenn Hubbard and Chris Edley are here representing the campaigns. That our own Bob Reischauer, we still refer to him as our own, has taken up since January the presidency of the Urban Institute. Hank Aaron, long time expert on social insurance, healthcare, and a host of other issues. And Stuart Butler from the Heritage Foundation are with us this morning.
We'll have our first presentations from Glenn Hubbard and Chris Edley, and then we'll go directly into a discussion which Dan will moderate. I want to stay before we start that this is being video taped for the Brookings web site, www.brookings.edu. It will be archived, and can be watched later. The transcript will be up by this afternoon. There are additional materials on this subject on our web site, including an online chat that Hank Aaron conducted recently in which he answered a number of issues that relate to the question of aging.
Our next P2K Forum will be held June 14th and will be focused on urban and metropolitan issues. We welcome you here this morning and without further ado, let me introduce Dan Schorr. Dan we regard as one of our own, too. He's been a stalwart at our Friday lunch for as long as I've been here, and for years before. He is, I think, the last active member of Ed Murrow's news team who is still practicing his profession. You hear his analyses regularly on National Public Radio. He has covered virtually every great story for 60 years, both abroad and at home.
And we're delighted to have you, Dan, as our moderator this morning. And if the panelists will come up, we'll commence.
Dan Schorr: The reason for that demonstration is, my understanding is, the reason I was asked to moderate is they wanted somebody truly old to underline some of the problems of the aging. I'm delighted to do it, though. And let me say that I think it turned out to be very fortunate that this is a subject for now, because it was planned a long time in advance, but as you watched this nascent presidential campaign go on, one becomes aware on many, many issues, the two candidates, presumed nominees, are talking past each other, and haven't come head-to-head. If there's any issue which I think has been joined, it is the issue of the aging and Social Security and so I think now we're in a better position to examine the two positions on this, and on many, many other issues which I think they still have to refine before they get to it.
The format will go something like this, we will have Glenn Hubbard of the American Enterprise Institute speaking first on behalf of the Bush campaign. And then Chris Edley, Christopher Edley, Jr., Harvard Law School, speaking on behalf of the Gore campaign. Both, I take it, know the positions of their principals pretty well.
We were then going to have them debate a little bit with each other, but we've made a last minute decision that in order to bring this to the people more, after they have finished, we will then bring in our experts without making too much of a debate. We're really looking more for an illuminating conversation than we're looking for a formal debate.
So, with no further ado, Glenn Hubbard.
Glenn Hubbard: Thanks, Dan. I would like to start by thanking especially Brookings for hosting events like this. In the presidential election season these debates and events are very useful in general, as Dan indicated, especially on this topic. This is a topic, the issue of policies toward the aging, in which there are clear intellectual and policy differences between the two candidates.
Before I begin my remarks, I just wanted to start with a reminder or observation that fundamentally we're here today to talk about a good news subject, living longer and opportunities that are created by longevity and by aging. This is a topic that spans a number of important policy areas in technology policy, healthcare policy, social insurance, pension policy, and economic policy.
Governor Bush's message in this area, a message that he has articulated to his advisors and then to the public since the beginning of the campaign is that preparing for these opportunities is not so much to be thought of as a budget problem but as a call for leadership, to rethink the key structure and financing of our programs without sacrificing past gains and current strengths. Today's topic is a bit broad for 15 minutes, while I hope to return in discussion to private pensions, an area of great research interest to me, and long-term care, and other topics, I want to focus on Social Security and Medicare.
One of the reasons that economists and the policymakers in this campaign have revisited Social Security and Medicare are the very large demographic changes that are affecting these programs. When Social Security was established in 1935, average life expectancy was 61. When Medicare was established in 1965, average life expectancy was 70. The positive demographic changes that we have experienced since that time, positive from the point of view of individuals living longer, are so dramatic that it's impossible and unrealistic to talk about relying simply on economic growth to maintain key social insurance programs. In Governor Bush's view, this is an opportunity as well, an opportunity to reaffirm the social compact among the elderly, the government, and future generations.
Saving Social Security to take that first and foremost involves leadership as opposed to the if it ain't broke don't fix it approach. The OASDI program has been a very successful program for reducing poverty among seniors, but modernization is clearly needed to meet the challenges posed by the pressures of an aging population. Probably the first and foremost challenge that's clear to economists and has surfaced in the campaign are approaching deficits. The system is based on a pay-as-you-go structure since the 1983 reforms, the system is currently producing cash flow surpluses with deficits over the long-term horizon. These interim surpluses have been routinely "borrowed" by the government to pay for various programs. While these IOUs are deemed, in budget terms to be assets of the Social Security system, they cannot be used to pay current benefits.
Indeed, to meet the promise implied by this budgetary activity in the trust fund, the government must eventually raise taxes, cut spending, or borrow more from the public. Under the past eight years, we have seen the present value of unfunded Social Security liability, Social Security deficits, grow by about 60 percent. Financing these deficits really has three choices. One choice that comes up in discussions of generational accounting in which economists compare the well-being of different generations in response to fiscal policy is to simply cut benefits substantially or increase payroll taxes substantially to maintain neutrality across generations.
A second approach would be to rely on budgetary arithmetic, that is to conceal deficits by issuing more government bonds as IOUs to the trust fund, leaving open, of course, the question of how funds will be raised to pay off these bonds. That lack of budget transparency has figured in proposals from the Vice President to double count interest savings from decreased borrowing as part of Social Security reform.
The third type of proposal is a centerpiece of Governor Bush's proposed schemes on Social Security reform, to use personal retirement accounts as part of a Social Security plan for younger workers, thereby bolstering the rate of return, and offering the opportunity to build real wealth.
Rates of return have been falling since the inception of the Social Security system. Today's workers can expect a real return of less than 2 percent. Future workers negligible. That pay-as-you-go structure and its maturation also create the problem of a lack of real wealth accumulation for many American families.
Just to give you a simple example, if a 22-year-old, a beginning worker, earning $20,000 per year at the beginning of her life, and then experiencing average wage growth, were to invest say 2 percentage points of payroll taxes in a personal account involving a mixture of stocks and bonds, that account would be worth about $100,000 in retirement.
I think it's fair to say that the centerpiece of Governor Bush's plans and discussions on Social Security is to start with principles to initiate a conversation with the American people, and not budget tricks. In particular, Governor Bush has sought to build a bipartisan consensus to save Social Security on the basis of six principles.
Principle Number 1, which I think of going back to the compact argument I made earlier, is that modernization, this improvement upon Social Security, must not change existing benefits for retirees now or near retirees.
Second, as a matter of budgetary integrity and transparency, the Social Security surplus must be locked away for Social Security.
Third, it should be possible not to increase Social Security payroll taxes in a reform.
Fourth, the government must not on its own invest Social Security funds in the stock market, instead those decisions about private investments best reside with individuals as decision-makers, as workers, as retirees.
Modernization must preserve the disability and survivors components.
And, finally, again, harkened as the centerpiece of the plan is that modernization must include individually controlled personal retirement accounts, which will augment the Social Security safety net. In the view of the Governor, based on his discussions with economists, these accounts will earn higher rates of return on average, have parameters of safety and soundness, and help workers build real wealth that can be passed on to their children.
This articulation of a set of themes based on sound economics, sound social insurance, and sound budgetary principles stands in contrast to the lack of a reform discussion from the vice president.
On the Medicare program, let me again start, as I did with Social Security, with the program as it was first conceived, and talk about the need for reform. The 1965 model of Medicare had two parts and does today, Part A, hospital insurance, which is largely financed by payroll taxes, about 87 percent. And Part B, the physician insurance part is financed principally by general revenue, about 75 percent. These two parts of the Medicare program together cover a little over half of the typical senior's health costs with the balance being covered either through medigap insurance policies or out of pocket expenses.
It's fair to say, as with Social Security, that Medicare has had dramatic successes in improving healthcare to seniors, but faces equally dramatic challenges going forward in terms of the scope of benefits, and in terms of solvency.
Taking first the solvency question, on the surface the way budget accounting is often presented, Medicare is okay measured by the short-term health of the Part A trust fund. Just to indicate how much of a lack of transparency there is in such an exercise, the Balanced Budget Act of '97 moved many of the home healthcare costs from Part A to Part B, which was then deemed to extend the solvency of the trust fund. That violates economic reality. In fact, the financial solvency is being undermined by precisely the same demographic changes that are undermining Social Security. That, again, raises the choice of raising taxes, reducing benefits, or reforming the system.
Another part that's clearly missing from the current Medicare program, but fortunately not from the current Medicare debate is the lack of prescription drug coverage. Unlike virtually all plans in the private sector, Medicare doesn't offer a prescription drug benefit, or a cap on out of pocket expenses. A third of beneficiaries currently pay for prescription drugs out of pocket, or go without them, and a tail of the distribution of the elderly spend a great deal of money out of pocket on prescription drugs. The current 65 version of Medicare also fails to provide access to many new technologies, and is bureaucratically complex.
Now, as with Social Security, Governor Bush's goal is to take a leadership role to talk about principles that have to guide any serious reform discussion. The first principle, as with the Social Security compact, is that Medicare's current guarantee of access to seniors and the disabled must be preserved.
Second, every Medicare recipient should have a choice of health plans, including the option of purchasing a plan that covers prescription drugs.
Third, Medicare must cover expenses for low income seniors. That is the entire cost of a health plan, including a prescription drug benefit.
Fourth, Medicare should provide access for seniors to many of the latest medical advances, and streamline regulations.
Fifth, raising the Medicare payroll tax, the HI tax, should not be a cornerstone issue in reform.
And, finally, as a matter of budgetary transparency, reform should establish a new solvency test combining program costs for Part A and Part B.
This idea of principles, not budget games, is, indeed, what has guided much of the debate over Medicare reform. As a starting point, the National Bipartisan Commission on the Future of Medicare with Senator Breaux and Representative Thomas introducing legislation had a reform plan modeled after the federal employee system, the FEHBP plan. That plan also called for a new solvency test, as did Governor Bush, based on the total cost of the program, which guaranteed protections for low income seniors, and a choice of government approved plans. The Clinton-Gore appointees, of course, helped block this reform.
Another bipartisan effort has been the legislation by Senators Breaux, Frist, Kerrey and Hagel. As president, Governor Bush has pledged repeatedly in his discussions of Medicare that he would work with both parties in a bipartisan way to build on these efforts.
So, let me just say a couple of things in conclusion, first to go back to where I began, I don't think we ought to frame the discussion of Social Security and Medicare reform solely as a "budget" problem. The opportunities that are created by aging and living longer are substantial and they are positive. They have and are stimulating thoughtful rethinking of Social Security, Medicare and other programs by economists and by policymakers.
Having said that, you don't have to be a budget bean counter to realize that we can't continue the policy of the past several years of hiding our head in the sand regarding the budgetary situation in honest and transparent terms of Social Security and Medicare. There are good principles and approaches with the support of both parties in the Congress and by leading economists and policymakers for Social Security and Medicare reform. Many of those proposals fit very comfortably within the general budget framework Governor Bush has articulated for his campaign. Governor Bush will work to provide the leadership for these important efforts to shore up the commitment to seniors, the positive part of this message, and the opportunities and challenges of aging.
Chris Edley: I also want to thank Brookings for hosting this series, and for inviting me and, like Stuart, I take heart in the title of today's session, Living Longer, suggests that there may be life after the campaign, even if the other guys win, and notwithstanding the risks.
Of course there's reason to be hopeful and pleased at the good news of longevity. Economists, on the other hand, tend to be Malthusian about this, and talk about all the terrible problems that it will generate. And, in fairness, there are problems, indeed, that have to be faced.
I want to cover three quick topics. First, Vice President Gore's overall conception of those challenges. Second, summarize for you some of his affirmative policy ideas concerning Social Security. And third, some of the affirmative policy ideas concerning Medicare. I think our discussion afterwards will provide ample opportunity to explore concerns with Governor Bush's proposals.
So, first, the nature of the challenge. Obviously, the demographic news is the key, and the doubling of the elderly over the next 30 years, but also I think some less noted aspects of demography that shape the way in which we have to respond to changes in Social Security and Medicare, changes such as the shifting