Tag Archive for: Medicare

Why There Are No ‘Fair’ Solutions Out of the Federal Government’s Spending Quagmire

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The federal government is facing very serious budget issues, dramatically worsened by the past few years’ expansion in profligate spending. But while that gets most of the fiscal headlines at the moment because of the national debt limit discussion, the Social Security and Medicare Trust Funds have far more unfunded liabilities than the official federal deficit. And those huge problems are well past the “something should be done” stage and getting very close to the “something must be done” stage. That has led some to reconsider reforming Social Security, the famous “third rail” of politics.

The mere possibility of that has energized those who fear that a change from the status quo might give them less, even though the huge financial holes involved cannot be sustained for long, meaning that “doing nothing” for now guarantees a worse deal for many soon. So such opponents are gearing up to prevent any move toward improved fiscal responsibility and sustainability that might involve reducing anyone’s benefits now or in the future by asserting that it would be unfair.

Unfortunately, however, if we rule out all options that might “unfairly” reduce benefits for current or future beneficiaries, we must be unfair to others. The reason is that the federal government has promised trillions of dollars more in benefits than taxes to fund them through Social Security (and even more so for Medicare), and those overpromises leave no fair way out.

Consider the option of reducing Social Security retirement benefits in one way or another. That is not fair, because government promises of ongoing retirement support have led people to believe in continued funding at the promised levels, and to adapt their behavior to those promises. Having done so (e.g., saving less privately for their retirement), it is unfair to cut that funding, because many who relied on benefit promises have become dependent on the government living up to them.

But there is a good reason for considering this possibility—if we continue to do nothing to change things, the trust funds will soon run out and benefits will have to fall substantially from then on, which would also be unfair, and potentially even more so.

Despite that, if history is any guide, any serious proposal of potential benefit reductions will not lead to rational discussion, but fights to make sure someone named “not us” will bear as much of the burdens as possible. We will witness a “guilt parade” of the most obviously pitiful and destitute beneficiaries, none of whom should be forced to “do without,” to remind us of its unfairness (just as we see struggling family farmers when agricultural or water subsidies are under fire; the most seriously ill when medical benefit cuts are proposed; poor, inner-city children when cuts to education funding are considered; etc).

Now, this fairness argument is partly correct. But only partly, because it does not consider the fairness of the alternatives. While benefit cutbacks can be considered unfair to those now and soon-to-be dependent on them, every alternative is unfair as well. Rather than choosing between fair and unfair options, we must choose between unfair ones.

Say we look to maintain benefit promises through substantially higher Social Security taxes. The problem is that people have also adapted their behavior to the promised extent of those taxes (already greater than income taxes for the majority of Americans), and some now depend on not losing any more take-home pay just as many recipients depend on not losing anticipated benefits.

Proposing that we just tax “the rich” more, as by increasing or even eliminating the income limits on Social Security “contributions,” would especially increase its unfairness to higher income earners, who are already paying far more in Social Security taxes than they will ever get back in benefits, and who also pay a sharply disproportionate share of income and other taxes as well (not to mention being in the crosshairs for further increases in those taxes).

Benefits could be maintained without increasing Social Security taxes by federal borrowing. But borrowing is just deferred taxation, so that would unfairly burden whichever taxpayers will be left holding the bag for those taxes. It would also increase the tax uncertainty faced by all Americans, who face a harder task of guessing how, where, when, and on who those future taxes will be assessed.

What about some sort of privatization? That could potentially increase the rate of return earned on retirement savings relative to what Social Security offers, improving the system from this point in time forward. However, such a move cannot magically eliminate its current multi-trillion dollar unfunded liabilities. And if future benefits are to be more closely based on private contributions than the current system, as privatization would require, treating those savers more fairly would unfairly take funds now used to subsidize the retirement of current workers, even though many of them paid far less in taxes than they will receive in benefits under the current structure.

Even doing nothing about Social Security to avoid treating people unfairly is unfair, since the status quo is unsustainable, requiring future commitments to be broken in a major way. Even Social Security statements now communicate that there will soon be too little money to meet their benefit promises.

It is time we realized that there is no fair way out from government Social Security commitments that exceed the funds available. Current overpromises mean that everyone has a plausible fairness claim on their side, yet something must give. The closest we can come to being fair is to avoid making any new over-commitments, to search for ways to make the program more sustainable (to reduce future unfairness problems), and to look seriously at the contentious issue of which of the options will minimize the adverse impacts of unfairness that cannot be avoided altogether. Demonizing any real consideration of the various options, as some have already started doing, only increases the likelihood that there will ultimately be more unfairness than necessary.

It’s also important to recognize that the inherent unfairness we must soon address is not limited to Social Security. That problem comes in the wake of any ongoing government program that offers benefits in excess of costs to beneficiaries at the start, because in a world without free lunches, that requires future Americans to be saddled with the burden of paying for those excess benefits.

So “not fair” also applies not only to the introduction and past expansions of Social Security, but also to current attempts to sweeten the Social Security pot, as with the Social Security 2100 Act. It also applies to Medicare, Social Security’s 1965 offspring, which faces an even larger financing hole, since early recipients got far more benefits than they paid for (both because benefits have increased and because early recipients paid for at most a few years at lower tax rates than now, but got benefits for the rest of their lives).

The same unfairness applies to any government trust fund with unfunded liabilities, such as for the Highway Trust Fund, due to be fully depleted within the next dozen years. (Since benefits from the road work began long before much of the associated costs came due, the program leaves more costs than benefits for succeeding Americans.)

The national debt reflects similar benefits that have not been paid for, unfairly leaving the tab for a huge pile of not-even-remotely-justified government spending projects and policies to later generations (not to mention providing the leverage for further expanding not-yet-paid-for benefits every time the debt limit expansion provides a must-pass piece of legislation).

It is worth remembering that in many areas that have been put under government control, the word “unfair” is correct. But that is because unfairness is baked in from the beginning of such government programs.

We can now only choose among unfair options which will be unavoidably difficult and unpleasant, with a government that has shown very little interest in facing those sorts of problems. And the way to prevent further inherent unfairness problems is not by embracing policies that attempt to buy votes today by creating policies where people are disproportionately treated (debt forgiveness, anyone?). Unfortunately, there is an ever-present pile of policy proposals whose political attraction is just such disproportionate treatment, which justifies little optimism for solutions arising out of the beltway anytime soon.

AUTHOR

Gary M. Galles

Gary M. Galles is a Professor of Economics at Pepperdine University and a member of the Foundation for Economic Education faculty network. In addition to his new book, Pathways to Policy Failures (2020), his books include Lines of Liberty (2016), Faulty Premises, Faulty Policies (2014), and Apostle of Peace (2013).

EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Trump Says GOP Should Not Cut Social Security As Part Of Spending Deal

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Former President Donald Trump is urging congressional Republicans to keep entitlement reform off the table as part of debt ceiling negotiations.

“Under no circumstances should Republicans vote to cut a single penny from Medicare or Social Security to help pay for Joe Biden’s reckless spending spree, which is more reckless than anybody’s ever done or had in the history of our country,” Trump said Friday in a video posted to TRUTH Social. “We absolutely need to stop Biden’s out-of-control spending. The pain should be borne by Washington bureaucrats, not by hard-working American families and American seniors.”

Republicans are threatening to oppose raising the debt ceiling if the increase is not accompanied by spending cuts. As part of Kevin McCarthy’s speakership negotiations, Republicans agreed to freeze the Fiscal Year (FY) 2024 budget at FY 2022 levels. While defense hawks like Foreign Affairs Committee chairman Michael McCaul of Texas are pledging to leave defense spending untouched, others, such as Texas Rep. Chip Roy, are pledging not to “touch” Medicare or Social Security.

“Cut the hundreds of billions of taxpayer dollars going to corrupt foreign countries. Cut the mass releases of illegal aliens that are depleting our social safety net and destroying our country. Cut the left-wing gender programs from our military. Cut the billions being spent on climate extremism. Cut waste, fraud and abuse everywhere we can find it. And there’s plenty of it. But do not cut the benefits our seniors worked for and paid for their entire lives. Save Social Security, don’t destroy it,” Trump continued.

Social Security’s Old-Age and Survivors Insurance Trust Fund is projected to become insolvent in 2033 if the program continues to pay benefits under current law, according to the Congressional Budget Office, meaning retirees will not receive full benefits. Some Republicans have acknowledged the program must be reformed in order to keep it solvent. Pennsylvania Rep. Lloyd Smucker floated means testing the universal program.

“We should ensure that we keep the promises that were made to the people who really need it, the people who are relying on it,” he told Bloomberg. “So some sort of means-testing potentially would help to ensure that we can do that.”

Social Security and Medicare combined make up more than 30% of the federal budget, and the number is set to increase as Baby Boomers continue to retire.

The U.S. Treasury on Thursday began taking extraordinary measures to avoid defaulting on the federal debt. Treasury Secretary Janet Yellen has estimated the government will go over the fiscal cliff at some point in June or July.

AUTHOR

MICHAEL GINSBERG

Congressional correspondent.

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EDITORS NOTE: This Daily Caller column is republished with permission. ©All rights reserved.

6 Things Paul Krugman Gets Wrong on Medicare by Charles Blahous

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My usual custom when writing about Medicare and Social Security finances is to simply present the relevant data instead of discussing others’ commentaries about the programs.

After this year’s Medicare trustees’ report was released, however, a subsequent Paul Krugman column prompted a number of questions from his readers, suggesting it would be helpful to address Dr. Krugman’s specific assertions.

The essence of Dr. Krugman’s column was to cite the latest Medicare report as evidence that “there never was an entitlements crisis.”

Dr. Krugman’s view of the Medicare financing outlook differs with the trustees’ perspective as reflected in our joint message, which states, “Medicare still faces a substantial financial shortfall that will need to be addressed with further legislation.” The difference between these two perspectives derives in part from problems of incomplete information and analysis.

Problem #1: Conflating expectations with reality.

Dr. Krugman’s piece points to long-term Medicare cost projections that now look less daunting than they did in 2009, and asserts that the entitlement cost problem is therefore “disappearing.”

That characterization, however, is incorrect. Comparing to prior projections is in this context a distraction, irrelevant to whether Medicare is now on a stable financial course (it is not).

The mistake is one of so-called “anchoring,” a behavioral economics concept referring to the powerful cognitive illusion whereby our perception of events is distorted by previous expectations.

Whether things are actually getting better or getting worse is not a function of the trend of expectations but of real-world data evolving in time. Medicare cost burdens are mounting, not easing, as the accompanying graph shows. Total program costs have been rising faster than our economic output, and are currently projected to continue to do so.

As many readers will intuit, it is highly problematic for any major spending program to grow significantly faster than the economy that must support it, as this can only lead to continually rising tax burdens, escalating debt, and/or crowding out other priorities.

Problem #2: Inconsistently measuring GDP

The graphs that Dr. Krugman reproduces to make his argument present projected Medicare spending as a percentage of GDP, contrasting this year’s projections with those of 2009. But in 2013 BEA redefined how GDP is measured, both historically and going forward. Adjusting the 2009 projections for this definitional change, one sees that a good portion of the apparent improvement to date is illusory.

Dr. Krugman’s piece does not as far as I can tell disclose this inconsistency. Correcting for it, the recent picture looks only slightly better than 2009 projections, and has actually been worse in some years.

Problem #3: The large apparent improvements are mostly projections that haven’t yet borne fruit.

As shown above, to date the Medicare cost picture is not greatly different than projected in 2009. All that’s really different are the future projections, especially over the long term. These anticipated improvements are due primarily to aggressive cost-containment provisions in the Affordable Care Act (ACA, or so-called “Obamacare”) as well as, to a lesser extent, the MACRA legislation passed earlier this year.

The ACA provisions involve ambitious reductions in the rate of growth of Medicare provider payments, while MACRA’s involve reductions in the long-term growth of physician payments. Similar past efforts have not been adhered to, and some experts are skeptical that these new measures will be. This is why the CMS Medicare actuary has prepared an alternative projection scenario showing much higher future costs.

We should all hope, whether we supported or opposed these laws, that their cost-containment provisions prove successful and sustainable. Were they to be abandoned, other provisions would need to be enacted in their place to achieve equal or greater savings – otherwise taxes and/or premiums must be raised.

That said, we cannot declare victory unless and until these provisions produce the savings now projected from them.

Problem #4: We haven’t fixed the entitlement growth problem, only changed the mix of entitlements.

Dr. Krugman’s graphs show 2015’s Medicare cost projections well below 2009’s, prompting the conclusion that any supposed spending crisis has been solved or never existed. But this leaves out a defining part of the overall picture.

True, the ACA reduced projected Medicare growth — but it also expanded Medicaid as well as created a whole new system of health insurance exchange subsidies.

If the thesis is that changes in spending projections since 2009 illuminate whether we really have an entitlement spending problem, one can’t simply show the one large entitlement where projected spending has gone down, and omit the ones where projected spending has gone up. Unfortunately, we cannot analyze the whole picture using the trustees’ methodology because the trustees do not issue projections for the ACA’s health exchange subsidies.

But earlier this year CBO estimated that by 2025, the ACA would add roughly $210 billion a year in new Medicaid and exchange subsidy spending, or roughly 0.8% of GDP. As it happens, 0.8% of GDP (adjusted for the changed definition of GDP) is roughly the amount by which the trustees have lowered (between 2009 and 2015) our projections for Medicare spending through 2025.

Given that these two effects almost net each other out over the next decade it seems inappropriate to state, as Dr. Krugman does, that “most of that projected (spending) rise has gone away.”

Problem #5: Crediting the ACA For Effects It Didn’t Cause.

Dr. Krugman’s column states in one place, “health spending began moderating after the passage of the ACA.” This is incorrect. The health spending slowdown began several years prior to the ACA’s 2010 passage (see CRFB’s “Exhibit 2”).

Dr. Krugman’s phrasing also lends itself to the misreading that the ACA is a primary reason for recent spending moderation. The CMS actuaries find, to the contrary, that the ACA’s effect has been on balance to slightly increase national health spending.

Problem #6: Not Reflecting Current Law.

Less egregious because it involves a relatively arcane aspect of budgetary scoring, the graphs shown by Dr. Krugman reflect the trustees’ estimates of the costs of paying scheduled Medicare benefits, which is not the same thing as would occur under current law (because, over the long term, current law does not provide for the financing of these benefits).

The distinction does not by itself undermine and indeed could be said to support Dr. Krugman’s argument that the entitlement crisis is overstated. It is, however, another reason why it is incorrect to credit the ACA for fiscal improvements, because on a literal law basis the ACA added on balance to federal entitlement spending, as CBO, CRFB and others including myself have explained.

Conclusion

Dr. Krugman’s piece reaches incorrect conclusions about entitlement spending challenges “disappearing” based on incomplete information and analysis. When critical missing information is taken into account, it is more readily seen that lawmakers still face a substantial challenge to address unsustainable spending growth in federal entitlement programs.

This post first appeared at e21.

Charles Blahous
Charles Blahous

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.