Two weeks ago I wrote about the national debt and the two steps necessary to appropriately address the problem, namely tax reform and entitlement reform. I offered a couple of ideas about how to proceed on tax reform, so this week I will discuss the two big entitlement programs — Social Security and Medicare/Medicaid. The admirable attributes of these programs are how they address periods in our lives we all will experience (such as aging, retiring and the need for additional medical care as we age) and spread the burden of these vulnerable times throughout society.
Contrary to common wisdom, Social Security is still solvent and functioning properly. This does not mean, however, that problems do not exist within the program.
Currently, Social Security can pay through 2042 according to the CBO. However, 2010 was the first year that benefits paid out exceeded tax receipts taken in, largely due to the extent of the recession. This isn’t terrible though because Social Security has a trust fund of $2.4 trillion in which the excess funds over the years have been placed.
The trust fund, however, is full of IOUs because the excess tax receipts each year get put into the Treasury’s general fund to finance other government expenditures. The Social Security Administration’s website makes this sound great because the tax receipts over and above benefits paid out get invested in government bonds with government guarantees on the principal and interest. What the SSA seems to forget, however, is that when the federal government pays interest, the tax payers are the ones financing the bills. So I’m not sure how good of a deal this is. In effect, the excess funds in Social Security have allowed government to grow more without paying the requisite bills, and one way or another, this will fall on our generation to figure out.
Another problem is that Social Security is funded through a highly regressive payroll tax of 12.4 percent split evenly between the employee and the employer. Although this was designed to share the burden, employees and consumers actually pay the tax (rather than the business) through lower wages and higher consumer prices. Employees pay 6.2 percent on earnings up to $106,800. This means that those who earn under $106,800 pay the full 6.2 percent of their earnings; however, each dollar over that maximum is untaxed. Thus, a person making $213,600 would pay 3.1 percent of their earnings and a millionaire would only contribute .66 percent of his/her earnings toward Social Security.
Another common misconception is that we pay into an account in our name what we deduct from when we retire. The reality, however, is that the current generation of workers pay the benefits of retired workers. The problem with this is that the tax rates that we pay to fund the current level of benefits may not be the tax rates and level of benefits that will sustain us when we retire. But rather than reduce the level of benefits, raise the earnings cap to $250,000. This will not adversely affect those who have limited funds and will not greatly affect those making over $106,800.
Medicare (health coverage for the elderly) and Medicaid (health coverage for the poor) are actually the two programs that are really driving the national debt.
The proportion of total transfer payments that went to Medicare and Medicaid has increased from 23.4 percent in 1980 to 46.1 percent in 2006, largely driven by skyrocketing medical costs. In fact, in 2006, the U.S. spent 5.4 percent of GDP on Medicare and Medicaid (with total health care spending — public and private — at 16.5 percent of GDP), while the same year Germany paid 6 percent of its GDP to fund universal healthcare for nearly all (92 percent) its citizens.
In addition, U.S. businesses are less competitive internationally because many employers provide employer-sponsored health insurance.This results in higher input costs since most advanced countries provide government subsidized healthcare and, in effect, take that cost off businesses’ balance sheets. Furthermore, the surplus supply of labor for low wage jobs means those jobs do not offer benefits like healthcare to attract more skilled individuals.
Without employer-sponsored insurance, many low income individuals forgo health insurance because of the high cost of premiums. The high number of uninsured individuals in the U.S. (more than 50 million in 2010) contributes to the rising costs because these individuals do not seek medical attention until it is absolutely imperative, in which case it is often much more difficult (and expensive) to treat. Instead of preventive care, these individuals go to the emergency room when their conditions worsen. The uninsured are disproportionate from the lower income brackets, so the hospital must cover their cost of care when they cannot. This results into higher medical costs for all and higher premiums for the insured which in turn causes more businesses to cut back on their health coverage — continuing the cycle of rising costs.
This is the vicious cycle of private health care in the U.S. Some of these people end up on Medicare or Medicaid so that the costs of these programs increase, making them less palatable politically. Many economists like to discuss in theory how to control medical costs, but the empirical evidence I see is to move toward a universal healthcare system (Medicare for all) because those countries that have such a health care system tend to spend less overall on medical care (like Germany). This leaves more income for other consumption goods and increasing standards of living.
People often talk of rationing in a universal health care system but the simple fact is that rationing occurs in all markets — it just depends how you want to ration health care: by need or by wealth?
To recognize that these programs need to be reformed is not the same thing as saying they are defunct or fundamentally unsustainable. Instead, it is a recognition that they are social programs and thus must adapt to changing social circumstances, changing demographics. Contrary to the House Republicans’ proposal to turn Medicare into a voucher program and let market forces take over, I do not think either programs should be privatized because personal security cannot be commoditized (hence why police, fire and military are provided by the government). Private markets work through supply and demand with the profit motive serving as the engine, and I’m not convinced this mechanism is the best for such vulnerable times in our lives.
Perhaps it is time to broaden our conception of personal security to include things such as well-being and health; no one wants to privatize police protection, so why is it so crazy to advocate for the nationalization of health care?