There’s No Need to Pick on the Elderly

With the election behind us, the pundits of conventional wisdom are now telling us it is time for the body politic to have the “courage” to cut health and retirement benefits for the elderly. Cutting benefits is usually presented as the path of virtue, necessary for going down the also virtuous path to balancing the budget.

Neither is necessary and neither is virtuous.

To begin with, budget balancing is a potential disaster in itself, particularly if it means a constitutional amendment that mandates balancing the government’s books no matter what the state of the economy. But if it is to be accomplished, there is no justification for calling on the elderly to make all the sacrifices. Social Security and private pensions have finally gotten those 65 and over to the point where their poverty rate is no higher than that of the working population.

Why give up those hard-won gains? Why pick on the elderly?

The “entitlements” under siege have presumably included “welfare,” which looms large in the public mind but is actually a relatively small part of the total when it comes to money spent. And with the block grants and devolution of responsibility to the states in the new welfare law, the numbers of welfare recipients will be reduced considerably.

The big-ticket items are health care and Social Security, which affect the vast working and “middle class” population. We are warned that we must cut the projected “growth” of these programs. We are told that Medicare, which involves health benefits to the elderly, is going bankrupt.

In fact, there are two Medicare funds, and the one that pays for physician and outpatient services (Part B) is in no trouble because it is supplemented as necessary by Treasury payments out of general revenues. It is only the Hospital Trust Fund (Part A) that has been forecast to run short in the year 2001, and the recent stabilization in costs makes that projection far from certain.

To be sure, there may be good reason to encourage greater efficiency in the provision of medical services, not just to those on Medicare, but to everybody. But health is an important matter. The American people value it highly and are rich enough to give themselves high-quality services. We don’t want to skimp on what we pay ourselves for our medical care, and there is no reason to want the government to skimp on what it pays for.

We can meet any hospital fund financing problem very simply, without cutting benefits, by having the Treasury supplement its financing as it does the physician fund. Earmarking roughly a percentage point of our income taxes to the Hospital Fund would do the trick.

Similarly, the prospective shortfall in the vast Social Security (OASDI) trust funds, which would not occur until 2029, 33 years from now, can readily be met by a change in financing, really merely a change in accounting. Whatever they are called, these trust funds are essentially special Treasury accounts. Our payroll taxes go right into the Treasury, and benefits are paid out by checks drawn on the Treasury.

The funds’ trustees estimate that increasing our payroll taxes by 2.19 percentage points from their current 12.4% total would keep the funds solvent to the year 2070. But you could accomplish the same thing--and not increase taxes--if you credited the fund accounts with the equivalent of 1.5% of our taxable incomes that we are already paying as individuals and corporations. This would change nothing real--not the taxes we pay, the deficit or the federal debt.

There are other accounting changes that also could solve the Social Security “solvency” problem. Many so-called reformers would privatize all or part of Social Security, in effect destroying our system of social insurance in the guise of “saving” it. They argue that returns in the stock market are much higher than the 7.8% tied to Treasury security market interest rates. These are the returns that have been credited to the funds’ account balances during the last year. Why not simply credit the funds, without privatizing, with rates of return in the stock market, say 10.8% instead of the Treasury security rate? These and other similar steps would add scores of billions to the Social Security balance sheet and promise “solvency” to 2070--with no changes in taxes or benefits.

Now, there is a real issue in the increasing proportion of likely retirees as the baby boomers get grayer and grayer.

There will be only 3 people of working ages 20 to 64 for each person 65 and over in 2029, compared with 5 workers now. Those numbers sound dramatic, but they are deceptive. They represent an increase from 20 elderly per 100 of working age today to 33 per 100 of working age in 33 more years. Thus, in the year 2029, each 100 workers would have 133 people instead of the 120 to support today--an increased burden of less than 11%. But since there will be fewer children to support because of the increased elderly population in 2029, there should be less than a 5% increase in the so-called dependency ratio, a crucial figure that relates the total number of children as well as elderly to those of working age.

Continuation of even only our very modest past economic growth of 1% per year in worker productivity would increase our output by nearly 40% in 2029. Out of that increase in output, there should be enough to give everyone--the elderly, the children and the workers--far more than they have now.

So let’s show some courage and wisdom. Let us provide the investment of all kinds, public and private, in health, education, research and infrastructure, along with the technology, equipment and construction that will offer a better future for all of us.

And stop picking on our elders. Old age is hard enough.