There is No Entitlement Crisis; There Is a Health Care Funding Crisis

Henry J. Aaron
Henry J. Aaron The Bruce and Virginia MacLaury Chair, Senior Fellow Emeritus - Economic Studies

September 1, 2009

Budget deficits are a problem. If allowed to continue and grow, they could undermine the stability of the entire U.S. economy. How? The cost of interest on mushrooming debt could become unaffordable. Lenders at home and abroad could lose faith in the U.S. capacity to repay, causing a crisis that would make the financial turmoil of the past year seem mild.

President Obama argues that curbing the growth of health care spending will prevent those problems. Others, including David M. Walker [AARP Bulletin, March], are equally disturbed by deficits but blame the problem on entitlement spending, including Social Security. The president is right; Walker is not. Here are the facts.

Current deficits primarily result from the recession—tax revenues are down and spending is up. As the economy recovers, deficits will diminish but not vanish. Bigger problems come later. Between now and 2050, annual federal spending on Medicare and Medicaid is projected to nearly triple, growing by almost 8 percent of total national income. The reason? The number of beneficiaries and the per person cost of care are both projected to increase. Over the same period, spending on Social Security and all other entitlements (including veterans benefits, the earned income credit and food stamps) is projected to barely grow—by about 0.5 percent of total national income.

These numbers tell a simple story. The long-term fiscal challenge arises almost entirely from federal health care spending. And because the nation is committed to delivering approximately the same standard of care to older people, the disabled and the poor as is available to everyone else, reforming health care delivery under Medicare and Medicaid requires system-wide reform. That is the president’s message.

Even system-wide reform cannot stop spending under Medicare and Medicaid from increasing a lot. The retirement of boomers and the continual extension of what doctors can do to extend and improve lives guarantee that these programs will keep growing. Added charges on beneficiaries can fill some of the gap, but not much. And cuts in Social Security aren’t the answer. U.S. benefits are already low by international standards. Furthermore, past legislation and the growth of health care costs mean that the proportion of earnings replaced by Social Security “take-home pay”—the amount mailed out to beneficiaries after Part B Medicare premiums have been subtracted—is dropping. As recent financial events have highlighted the fragility of pensions, investments and other asset income, they underscored the crucial importance of Social Security. Further cuts are unwarranted.

The simple truth is that if the nation is to honor the commitment to provide comparable health care to everyone, Americans will have to pay higher taxes. Responsible stewardship for our country and for younger generations requires reforming health care and sustaining, not cutting, already modest Social Security benefits.