Budget Priorities: Funding Shortfalls for Social Security and Medicare Not All That Dire

To hear some people tell it, the budget deficit is the nation’s number one problem, and the reason for the deficit is that entitlement spending—meaning Social Security and Medicare—is out of control.

Wrong, wrong, and wrong!

Let’s start with the budget and government debt. The Congressional Budget Office has just projected that U.S. national income will grow faster than public debt for the rest of this decade. If the economy were operating at full employment, the ratio of debt to income would fall still more. To be sure, growth of debt is expected eventually to outpace income growth as baby-boomers retire.

But today’s most pressing challenge is not deficits and debt. It is continued high unemployment. Nearly 11 million people remain unemployed. More than 4 million would-be workers have been out of work six months or longer. Behind those dry numbers is the sad fact that millions of Americans who want to work are idle and losing, or failing to acquire, skills. Successive cohorts of graduates of high-schools, colleges, and professional schools have been unable to find work doing what they were trained to do or to find work at all. Those skills, lost or never acquired, will burden the nation for decades. To argue that debt is a most urgent problem when the ratio of debt to national income is falling and when unemployment remains stubbornly high is simple nonsense.

Well, some say, perhaps that is true right now. But when that tsunami of baby-boomers retires they will draw Social Security and Medicare and the nation will drown in deficits.

Let’s look at those concerns, starting with Social Security. To be sure, Social Security outlays relative to national income will rise as the baby-boomers retire. It is also true that projections indicate that revenues earmarked for Social Security will become insufficient to pay all promised benefits in about two decades. But U.S. Social Security benefits are lower, however one measures them, than those of fifteen of the world’s eighteen wealthiest developed nations. The lifetime value of U.S. Social Security benefits is 40 percent lower than the average of those nations. Legislation, yet to be fully implemented, will cut benefits roughly 7 percent for new beneficiaries over the next decade. The total increase in Social Security outlays, measured as share of national output, will be less than one-fourth as large as the spending increase that occurred because of the recession.

So, the right stance regarding Social Security is that action should be taken as soon as possible to close the projected long-term imbalance. Because Social Security benefits are so modest and because benefits have been cut and will be cut some more, I believe that most of the imbalance should be closed by increasing payroll taxes. But, whether or not you agree with me about that, the funding gap is modest. It is technically easy to close. The choices are well understood. A problem? Yes. A crisis? Not even close.

A growing number of people from both the political right and left have come to recognize that restoring long-term balance to Social Security is not a “heavy lift.” Medicare, they say, is the larger challenge, and we don’t really know how to fix that problem. I am not pointing fingers here—that is exactly what I used to say.

But there has been some good news lately—enough good news, in fact, to suggest that the dire projections of Medicare cost growth may not be confirmed. For decades, health care spending grew more than 2 percentage points a year faster than income. That gap vanished almost completely six years ago. Part of the reason is the recession—when people don’t have jobs or fear losing them, they spend less on virtually everything, including health care. As economic recovery proceeds, some rebound in health care spending should be expected. But the health cost slowdown began before the recession, and experts find that no more than about one-third of the slowdown can be attributed to it.

Other factors than a weak economy are at work. High-deductible insurance plans have been spreading. Physicians and hospitals have been changing they way they deliver health care. The proportion of physicians paid by salary, rather than piece-rate for each service performed, has been increasing. The advent of new drugs has slowed, and the use of generics has increased.

Though still reviled by many, the Affordable Care Act (or Obamacare) promises to continue to slow the growth of Medicare spending—not by curtailing services, which it actually expands, buy by lowering payments to providers. The Congressional Budget Office projects that Medicare spending per person will grow less rapidly than income for the next decade. In fact, Medicare spending per person has grown at about the same rate as non-Medicare health care spending for decades and a bit less rapidly since 2000.

No one claims that the U.S. health care system is a model of efficiency. On the contrary, it is flabby with spending on services that produce few benefits or none at all. But Medicare is neither better nor worse than the rest of the system in most respects.

Medicare does suffer from some specific problems of its own. The most notable is that it does not provide adequate coverage of extremely costly and protracted illnesses. That gap is one of the reasons why most people seek supplemental coverage. Congress should expand Medicare to encompass catastrophic events.

In one respect, however, Medicare is better than most private insurance coverage. Most employment based coverage offers workers little choice—a single plan or a few, at most. Medicare now offers enrolles abundant choice and promotes competition among competing private plans. Medicare enrollees may take the traditional program or enroll in any of a wide range of competing private plans under Medicare part C.

Improvements in Medicare can be made. Money can be saved. President Obama has proposed such changes. Congress should enact them. But the overriding problem is not Medicare but the health system as a whole—how to make care more cost-effective and assure that everyone has access to adequate treatment.

It would be refreshing if Congress discovered a capacity to multi-task—to simultaneously promote growth—by reforming the tax code and enacting a broad program of investment in our deteriorating infrastructure—and enact sensible reforms of Social Security and Medicare. But given its well-established capacity for inaction, it would be even nicer if it could do one job really well. And promoting economic recovery should come first.