The Smart Money: Entitlement Reform

Posted Monday, December 24, 2012 in Analysis

The Smart Money: Entitlement Reform

by Gina Hamilton

Out of every dollar spent by the federal government, 47 cents is spent on entitlements. 

Entitlements are things that people paid taxes specifically to support, such as Social Security and Medicare, and low-income supports, such as Medicaid, as well as interest on the national debt.  Because people are living longer, combined with a blip in the demographics that we call the Baby Boom, the funding for these programs isn't keeping up with the costs.

It's not surprising that Congress turns its eyes to entitlements when it is trying to solve a fiscal problem; it's a huge part of the budget, and entitlements are guaranteed.  But there are options for reform that won't hurt the neediest and seniors, if Congress can just get its collective head around a few points.

1.  The biggest problem with Social Security is a temporary one.  The vast majority of the Baby Boom will pass out of the system by 2075.  This means that the current ratio of one senior being supported by two and a half workers will revert to the normal balance, which is one senior to every five workers after that date. It is often difficult for Americans to think beyond the next election cycle, but in this case, as in many others, it is essential that Congress think long term.

2.  The biggest problem with Medicare/Medicaid is not that more people are using the program, it's that some of the costs are too high.  Many countries, including our neighbor to the north, forced pharmaceutical companies, for example, to adhere to a particular price point for drugs.  This is already being done by the Veterans' Administration and has saved that agency about $14 billion per year.  Medicare and Medicaid are projected to save much more -- perhaps $200 billion per year.  Other price points can similarly be brought down by some ruthless negotiation, and new and improved record keeping can keep unnecessary testing and other procedures to a minimum.

3.  Bringing more money into the system is imperative, at least in the short term.  There are a couple of ways this could be done, but the easiest answer for Social Security is to lift the cap.  People pay payroll taxes until they have earned $110,100 per year.  After that, they are no longer liable for the 6.2 percent payroll tax, nor is their employer (who pays the same amount.)  With the sole step of eliminating this cap, Social Security would become solvent for the next 75 years -- long after the last of the Baby Boomers (statistically) pass on. For Medicare, the costs of buying into the system could be two-tiered ... that is, the more you earn, the higher percentage you pay in.  According to the 2010 Annual Report of the Medicare Trustees, Medicare would be able to pay 100% of benefits for the next 75 years if the applicable tax rates were increased by between 0.61% and 1.91%.  Since employees pay half, the amount of tax increase would seem negligible. 

4. 'Means testing' Social Security and Medicare.  If a senior doesn't need that $2,000 per month check from Social Security because he is retiring on investment income to the tune of $400,000 per year, or if she works for a company (or government entity) that offers retiree health insurance, it seems logical that there should be some mechanism in place to take that particular senior out of the system.  Yes, they've paid into the system their whole working lives, but all of us have paid into the system taxes for which we will never receive any direct benefit ourselves.  Childless adults pay school taxes, for instance.  Nonmilitary people pay for health insurance for military dependents.  People who have never owned a car pay for interstate highway systems.  Yes, there are indirect benefits to these things for all of us, but there are also indirect benefits to wealthy seniors or seniors who have private health insurance when other seniors receive benefits, too.  Keeping seniors healthy and out of poverty is a net benefit for the whole society.

5.  Expanding Medicare to include healthier young adults and children.  The costs of Medicare are so high because those on it tend to be those who are likely to be facing significant health problems.  Essentially, Medicare exists as a high-risk pool for those over 65.  But if Medicare were offered as a public option on the insurance exchanges as they begin in 2014, at the market cost, many people would come into the program, and pay a significant amount of money to be there.  For instance, a 1998 General Accounting Office report suggested that if Medicare was universal, taxes for a typical family would increase by $731 annually and Medicare would be solvent forever.  That's about what the typical family pays for private health insurance every month.  Even without universal Medicare, opening up the program to a family of four at a yearly cost of, say, $1,000, while taking into consideration cost-saving moves such as negotiating national rates for drug coverage would easily make the system solvent in perpetuity.  The reason for this is that Medicare has a very low administration rate and no shareholders except the taxpayers.  Medicare's employees earn federal government salaries and don't get massive bonuses.  Its overhead is about four percent, as opposed to anywhere from 10 - 30 percent for private insurance.

None of these issues are particularly difficult to implement.  They simply require political will that may or may not be present in this Congress. 

So, yes, entitlement reform may be absolutely necessary.  But before condemning Grandma to working for another two years, let's look at other ways to fix the problem.

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