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Up Front

Federal policies for graying America

Douglas W. Elmendorf

Yesterday evening I gave keynote remarks at the second annual conference of the MIT Center for Finance and Policy. My comments offered my perspective on federal policies for our aging population.

Older Americans are supported by a combination of public programs and private resources. To ensure that this support will be sufficient in coming decades for the growing number of older Americans, we should make significant changes in Social Security, Medicare, and tax incentives for private saving. These changes also would go a long way toward putting the federal budget on a more sustainable trajectory. And given the trends in income growth in recent decades, those changes should protect people of modest means by imposing most of the burden on affluent people.

For Social Security, I argued that we should make the trust funds sustainable for 75 years primarily by reducing benefits for high-income beneficiaries and raising payroll taxes on workers with high earnings—but not by making significant across-the-board cuts in benefits. Significant across-the-board cuts would significantly reduce total retirement income for many lower-income and middle-income people, who have generally been experiencing very slow income growth. To avoid such cuts, some of the standard arrows in Social Security reformers’ quiver, such as increasing the eligibility age for full retirement benefits, should be a last resort rather than a first resort.

For Medicare, I urged two sorts of changes. First, we should increase the role of means testing, for the same reason we should avoid across-the-board cuts in Social Security. Second, we should accelerate ongoing transformations in how the program pays for health care. Expanding the existing system of private insurance in Medicare—known as Medicare Advantage—into a system known as “premium support” would strengthen price competition and thereby lower total costs. In addition, the fee-for-service program in Medicare should press ahead with changes in how it pays providers.

For tax incentives for personal saving, I argued for an overhaul to both increase saving by people who are under-saving today and reduce the federal cost of those incentives. Studies suggest that a significant minority of Americans is not saving enough now. At the same time, the federal subsidies for saving are expensive, go overwhelmingly to higher-income people, and may not have a large impact on people’s saving. Various proposals would reduce tax subsidies for large savers and would strengthen incentives for employers to arrange for retirement savings plans for their employees, to automatically enroll employees in those plans and establish default contributions, and to increase annuitization in those plans.

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