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Issue #18, Fall 2010
Attention: Deficit
Should progressives embrace entitlement reform? Or look elsewhere to narrow the gap? An exchange between two leading fiscal experts.
by Isabel Sawhill and Greg Anrig

  
I
sabel Sawhill: The growth of entitlements is on an unsustainable path. If allowed to continue, spending on Social Security, Medicare, and Medicaid will require untenable tax increases, crowd out almost all other spending, or lead to a dangerous accumulation of debt. If any of these scenarios unfolds, the nation’s ability to remain economically competitive will be substantially weakened, and enormous burdens will be imposed on the poor and middle classes.
As all sides in the debate know well, the politics of entitlement reform are toxic. Only 7 percent of the public is in favor of cutting spending on either Social Security or Medicare. Shielding these programs from change–almost any change–has been a winning hand for progressives in the past, including in 2005, when George W. Bush’s Social Security privatization efforts crashed. But it’s a political strategy that may jeopardize the entire liberal agenda going forward.
First, preserving the status quo will erode trust in government. A government that has lost control of its fiscal future, with most of its budget on automatic pilot and a fifth of its expenses unpaid for, cannot garner much respect from its citizens. The Urban Institute’s Eugene Steuerle calls this a decline in “fiscal democracy,” because mandated spending–the product of past decisions–absorbs all revenues, leaving no scope for policy innovation if these programs are considered untouchable. Already the “big three” entitlements are absorbing 71 percent of all revenues. The erosion of trust that fiscal indiscipline engenders will, over time, leave the party that wants to use government for progressive ends unable to win elections. We are already seeing public frustration with fiscal profligacy producing political victories for those who seek to minimize the activist state.
Second, preserving these programs is a transactional strategy that, despite its political benefits, is at odds with transformational ideals such as providing greater prosperity and opportunity for all Americans. If progressives care about protecting the less advantaged along with other social programs, finding savings in the big three entitlement programs will be essential. Unless we free up resources to invest in education and job opportunities for younger Americans, and provide a healthy start for children from less advantaged families, prosperity and opportunity will elude us. The rapid growth of spending on entitlements has already forced the Obama Administration to propose a freeze in non-security domestic spending. In California, Governor Arnold Schwarzenegger has proposed eliminating the state’s welfare-to-work program as well as most child-care assistance for low-income families, a harbinger of what may happen at the national level as the budget squeeze plays out over the next decade or two.
Third, the higher tax rates that unreformed entitlements will demand in the future will be even more unpopular than making the needed reforms now. Without reform, taxes would have to double or triple by 2050, according to the Congressional Budget Office (CBO). There is no lock box out of which the government can fund the costs of those who are retired. Yes, there are trust funds for Social Security and a portion of Medicare, but these funds contain nothing more than paper IOUs, not real resources that can be used to pay the costs of these programs. There are only today’s and tomorrow’s workers, whose capacity to pay the retirement costs of their parents’ generation will depend on earlier investments in their own education and other productivity-enhancing programs. Higher taxes are inevitable, but a doubling or tripling of taxes for working-age families is neither economically sensible nor politically feasible. Even before the current recession, the high costs of housing, child care, and college tuition left their wages stagnant, their job security threatened, and their pocketbooks flattened.
Reforms enacted now can be phased in gradually–no one need be seriously hurt in the process. Pushing through such changes now would send the right signals to financial markets, while slowing their implementation would provide time for the economy to recover from recession and for those approaching retirement to adjust to any reform.
What kinds of changes should progressives support? First, because health care is the biggest problem we face, we should craft reforms recognizing that not all spending on health care improves health. Second, reforms should trim benefits for the more affluent while protecting those at the bottom. Third, reforms should leave our core commitments to Social Security and Medicare intact and ensure that no one is left bereft of access to basic health care and a decent income in old age. It is only by returning these programs to solvency that we can ensure that they will be there for those who need them most.
Everyone knows that health care is the big enchilada. The recently enacted Affordable Care Act expands access to health care, but its effects on projected deficits and health-care spending trajectories are very small and highly uncertain. (For more on the health-reform legislation, see Jacob S. Hacker’s piece, “Health-Care Reform, 2015,” in the current issue.) While a portion of the projected increase in Medicare and Medicaid spending can be attributed to the aging of the population, a bigger portion is due to rising health-care costs per capita in the public and private sectors. Health spending has grown about 2.5 percentage points faster than the economy over the past four decades. If this trend continues, Medicare and Medicaid alone will absorb every dime of federal revenues at current tax rates by some time in the 2040s. These cost increases are driven by the availability of new and better treatments and drugs, the open-ended, fee-for-service nature of the system, and a lack of incentives for either providers or beneficiaries to control costs given that most of the bills are sent to third parties (either employer-based insurance plans or the government).
Given these problems, what can be done? Over the long term, there will need to be structural reforms to the health-care system, with the goal of providing better care for less money. In the shorter term, reducing costs may well require setting limits on per-capita public spending. Such limits could lead to cost shifting to individuals or to the private sector, or to a denial of needed care to consumers. However, without such limits, it’s doubtful that the needed reforms would happen quickly, and some of them may not happen at all. Limits provide the discipline within which greater efficiency becomes not just possible, but also necessary.
How do we achieve greater efficiency? One option is to link provider reimbursements and public subsidies for patients to evidence of effectiveness. Right now, there is little relationship between medical expenses and patient outcomes. Indeed, some estimates suggest that roughly 30 percent of all health-care expenditures do nothing to improve people’s health. Instead of paying for more and more treatment, we need to start paying for better outcomes wherever possible.
Social Security is a far smaller problem than Medicare. Like Medicare, the costs of the program are rising because of the aging of the population. Because of increased longevity, today’s seniors are expected to spend one-third of their adult lives in retirement. If enacted soon, Social Security reform could make the system solvent again without reducing benefits at all for those who are most vulnerable or dependent on the system, such as the disabled, low-income individuals, and the frail elderly. Indeed, any reform of the system would probably shore up benefits for at least some of these groups and address any gaps or inequities in the process.
To reduce costs, one alternative is to slow the growth of benefits for the more affluent while protecting, or even improving, promised benefits for those whose lifetime earnings have been more limited. No one would get less than they do now, in inflation-adjusted terms, but the amount of income replaced by Social Security benefits alone would decline modestly for those whose incomes were in, say, the top fifth of the distribution. Currently, household incomes of seniors in this quintile exceed $75,000 a year, a figure that will be closer to $100,000 a year by the time any change in the benefit formula were to take effect. This linking of benefits to income is something that liberals should applaud. It would not only make benefits more progressive but also increase public confidence in the system and its ability to provide for all those who really need it.
Another option is to raise the retirement age. Under a law enacted in 1983, the normal age of eligibility was gradually increased to 67–but this provision will not take full effect until 2027. By accelerating the implementation of that provision and then indexing the normal retirement age to increased longevity for younger cohorts until it reaches age 70, a significant portion of the current financing gap (about one-third) could be closed.
Although there are other reforms that might make sense, these two illustrate what needs to be done, and by themselves would eliminate the 75-year fiscal imbalance in the Social Security system.

ISSUE #18, Fall 2010
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Isabel Sawhill and Greg Anrig are, respectively, the director of the Budgeting for National Priorities project at the Brookings Institution, where Sawhill also co-directs the Center on Children and Families, and the vice president of policy and programs at the Century Foundation and the author of The Conservatives Have No Clothes: Why Right-Wing Ideas Keep Failing.
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