Preventing Medicare and Social Security from going broke

Today’s topic: At what point in the economic recovery can Washington turn its attention to addressing the impending insolvency of Medicare and Social Security? Dean Baker and Maya MacGuineas finish their debate on the relationship between unemployment rates and economic recovery, and how much Washington can do about both.

Point: Dean Baker, Center for Economic and Policy Research

We should separate the issues of getting the economy on track and fixing our long-term deficit problems. As long as the economy is suffering from excessive levels of unemployment, it would be foolish to take steps that would throw even more people out of work. This kind of fixation on deficit reduction caused President Franklin Roosevelt to throw the economy into a second recession in 1937 as he sought to cut back the stimulus he put in place. We must be careful to avoid the same mistake going forward.

In terms of the long-term deficit problems, it is essential to separate out Social Security, Medicare and Medicaid. According to the Congressional Budget Office, Social Security will be financed fully from its own stream of tax revenue through the year 2048. It is projected to face deficits in subsequent years due to the fact that our children and grandchildren are projected to live longer than we do. We will have to adjust the spending or revenue streams at some point for this program, but it is still a distant problem.

We should also be clear that any cuts any time soon must be completely off the table. Due to the loss of home equity and the plunge in stock prices associated with the collapse of the housing bubble, the vast majority of baby boomers will have almost nothing to support themselves in retirement other than their Social Security benefits.

The problem with Medicare is that our healthcare system is broken; we pay far more than other wealthy countries for our care and get worse outcomes. We don’t need to fix Medicare; we need to fix our healthcare system, and this is something we should have started yesterday.

The remedies are actually easy; the problem is that the political will does not exist to challenge powerful vested interests such as the insurance industry, the pharmaceutical industry and the doctors lobbies. Close to 20% (about $500 billion a year) of our healthcare spending is wasted on financing the insurance industry and the paperwork requirements that it imposes on providers.

We pay almost twice as much for prescription drugs as other countries. If we could get our costs in line, it would save us close to $100 billion a year. If drugs were sold in a competitive market without patent protection, we would save more than $200 billion a year. If we paid our doctors the same salaries as those in other wealthy countries, we’d save another $80 billion a year.

All of these changes would be doable if it weren’t for the power of special-interest groups in Washington, as we see in the current debate on healthcare reform. If it proves impossible to fix our healthcare system, we can still save a vast amount of money by simply going around it. Why not let Medicare beneficiaries buy into the more efficient healthcare systems of other countries and split the savings? This could save us tens of trillions of dollars over the next few decades. We just need a Congress that isn’t scared to stand up to the protectionists and the special interests.

Counterpoint: Maya MacGuineas, New American Foundation Committee for a Responsible Federal Budget

Unfortunately, one of the outcomes of this recession is that the faraway fiscal problems are now at our doorstep. It has been well known for years that Social Security and Medicare need altering to deal with the financial imbalances in those systems. Yet basic partisanship and an unwillingness by politicians to make tough choices has stood in the way. Keep in mind, the sooner changes are made, the more gradually they can be phased in and the more time beneficiaries will have to prepare for the changes that would affect them.

We no longer have the luxury of time. The Social Security trust funds have shrunk dramatically because of the recession. Already, those trust funds were misleading; in order to repay them when the money is needed to pay retirees, the government would have to raise taxes, cut government spending or borrow -- the same policy options that would have been necessary if the trust funds had not existed in the first place. In its use by lawmakers as an accounting technique and a mechanism to fund government spending, the trust funds have been a failure. Now on top of that, the funds have less money to provide the rest of the government with dollars to borrow. The bottom line is that we should have been making changes to Social Security years ago once we knew there was a problem; there is no excuse for further delay.

With healthcare, I was hopeful that the reforms to come out of Congress would be large enough to fix Medicare and Medicaid, or at least go much of the way (the problems are so large, there will probably have to be several rounds of “healthcare reform”). But it is likely that none of the bills under consideration will go far enough, especially after they are further watered down on the cost-saving side. (Click here and here to see a comparison chart of the bills.)

Sooner or later, the types of changes that I believe will have to be made include raising the retirement age for both Social Security and Medicare, means-testing the programs and creating an overall government healthcare spending cap. Can I imagine the political attack ads that will be run against anyone who dares explain this to the public? Of course. I only hope there are members of Congress who are courageous enough to tackle these issues honestly and head on.

When it comes to entitlement reform, we should have started yesterday.

Thanks, Dean, for an interesting discussion.