Health and Debt: The Commission, Part II
The International Monetary Fund is warning that the U.S. national debt will exceed 100% of GDP within the next five years, and economists both here and abroad are expressing alarm. The debt problem is mainly an entitlements problem and the entitlements problem is mainly a health care problem. How serious is it?
President Obama has appointed a commission on the federal debt (National Commission on Fiscal Responsibility and Reform), mainly focused on Social Security, Medicare and Medicaid. To signal his seriousness about this venture, the president has even gone so far as to put the newly passed health reform bill on the negotiating table — although the ink on the new law is barely dry.
As I explained at The Health Care Blog the other day, here’s the bottom line: Our entitlement problems all stem from the fact that these programs are run like Bernie Madoff chain letters. Since payroll tax revenues are spent rather than invested, workers are accumulating benefits that are not paid for. Implicitly, we are creating huge obligations for generations not yet born — people who never agreed to be part of the scheme and who will surely be worse off if they participate.
They say our love won’t pay the rent. Before it’s earned our money’s all been spent.The worst possible outcome from the Commission would be a value-added tax (VAT) and other measures that have no other purpose than to temporarily shore up the Ponzi schemes and push the can down the road a bit. Real reform means converting our pay-as-you-go systems into funded systems for both Social Security and Medicare. Real reform means creating systems in which each generation saves and invests and pays its own way.
As of last year’s Social Security/Medicare Trustees report, these two programs had an unfunded liability in excess of $107 trillion (see the table), about 6 ½ times the size of the entire economy. This is the excess of promises we have made over and above expected dedicated taxes and premiums. To avoid draconian benefit cuts or tax increases in future years we would need to have that $107 trillion in the bank, earning interest today. But of course we do not.
The $107 trillion figure is based on looking indefinitely into the future. A different way of accounting is to use the method private companies and state and local governments now have to use. If we halted these programs tomorrow, collecting no more taxes and allowing no more benefit accruals, how much do we owe people for benefits they have already earned? Answer: $52 trillion, more than three times the size of GDP!
Of more immediate concern is the cash flow problem these programs are creating. Social Security and Medicare combined are paying out more than they are taking in. As the baby boomers retire, the deficit will grow dramatically. Currently, we are using about 1 in every 7 general revenue dollars to cover the deficits in these two programs. By 2020, we will need more than 1 in 4. By 2030, we will need almost 1 in 2. (See the figure.)
What that means is that in order to balance the budget at current tax levels, in just 10 years the federal government will need to cease doing about one out of every four (non-entitlement) things it has been doing. In just 20 years, the government will need to stop doing about half of every other thing it has been doing. Clearly, elderly entitlements are on a course to crowd out everything else the federal government is doing.
Note that this problem is mainly a health care problem. At nearly $86 trillion, Medicare’s unfunded liability is almost six times the size of Social Security’s. Note also that these numbers do not include Medicaid — which is almost as large as Medicare (including both state and federal spending) and which will be much larger than Medicare once the new health reform legislation is fully phased in.
Any day now, we should be getting a new report from the Trustees of Social Security and Medicare. The immediate news interest will be in how the recently passed health reform legislation will affect the trust funds for these two programs. But this is a minor issue as far as the nation’s fiscal health is concerned. The real issue is whether we will muster the political will to enact reforms today that will become more painful to enact the longer we delay the inevitable.
During the past several years, the economic downturn has been repeatedly blamed on corporate CEOs that are perceived to be overly-focused on short-term goals. Purportedly, CEOs take risks to boost stock prices due to a compensation system that is too heavily slanted towards stock options. This is one of the many mantras that proponents of larger government use to claim the private sector cannot be trusted.
However, big-government types never seem to talk about how our debt problem is an entitlement problem caused by politicians who are too focused on short-term goals. Politicians can get elected (or re-elected) by promising benefits to the masses that don’t have to be repaid by the current generation of voters. By the time the debt burden becomes an economic crisis, the politicians involved will be long retired or dead. This creates a systemic risk far beyond anything caused by bankers speculating on derivatives to boost the value of their stock options.
Anyone who’s looked at a state budget recently realizes that with all the unfunded government worker pensions, we’re in big trouble. Then you have people like Rich Trumka, president of the AFL-CIO. He thinks that we don’t have an entitlement problem, but rather, a revenue problem. In the world according to Trumka, no benefits need be cut, no retirement ages adjusted. Simply requiring the rich to pay a fairer share would bridge the gap. How are you going to have a serious discussion about entitlement reform when the Democrats are the party of all the Trumkas of the world?
As a “millennial,” this does not bode well for my generation.
Ronald Reagan did away with the progressive tax in the 80’s. Wall Street and health insurance companies have been deregulated throughout the 90’s and 2000’s, which is also when millions of American jobs went overseas. Without progressive tax and a middle class how on earth can there be entitlement reform? Republicans, Democrats, whatever. It doesn’t matter which party institutes what, without jobs, decent wages and progressive tax this problem will only continue to get worse. Go back to “pre-voodoo” economics and the problems will start to get solved. Reregulate Wall Street and institute the 28th amendment and maybe we can get back on track. Until then we can only expect rampant poverty and unemployment to pull us even further into the muck of fiscal crisis.
The principle that each generation should have to pay its own way by saving for its future needs looks good on paper, but one wonders how it could possibly be applied in public policy. It requires an ability to sacrifice now for a long term need with considerable uncertainty. This is decidedly not the American way. It also requires some sense of medical costs in the future. Since these costs have been out of control for decades and at largely unpredicted rates of increase how can one expect that we can make good projections. There is simply too much uncertainty for this to be feasible or credible. Beyond that it would require a massive effort at coercion of physicians and the produces of costly technologies to control costs at their source.
Having said that, I concur that something is going to be required of a drastic nature. At the very least we need a means test for Medicare comparable to the one that we use for Medicaid. The elderly, and that includes myself, ought to have to demonstrate that they need financial help via Medicare before the public doles out the money. If we impose a means test we abolish Medicare per se and put the elderly who cannot pay their own bills under Medicaid. (Try that on for political feasibility-not very likely is it) Either that or we ought to use something like the Social Security system which offers at least a rough relationship between the payments that one gets and the amounts paid in while working.
Perhaps more fundamentally we need for all of us in “our late innings” to think more seriously about just how much medical care we are entitled to consume given how much it costs the rest of our society. Our moral responsibility needs to be examined in all venues where moral issues can be raised and discussed intelligently. That clearly means somewhere other that the US Congress or Presidential campaigns.
The Social Security Trustees assume a very low economic growth rate (1.9% long term) and they don’t do sensitivity analyses on this assumption. At an average annual real economic growth rate of 3.5%, the entire problem vanishes, with no tax increases and no benefit cuts. Do the math and see.
John wrote: “Since payroll tax revenues are spent rather than invested, workers are accumulating benefits that are not paid for. Implicitly, we are creating huge obligations for generations not yet born.”
John, you are correct that these obligations are implicit, not explicit.
Public debt is an explicit obligation, in which interest must be paid out of general revenues.
The debt that Social Security and Medicare owes the Treasury, since the payroll tax revenues were spent on general federal expenses, is implicit debt.
That means even the interest need not be paid, until the trust fund expenses exceed revenues.
If the government can solve any trust fund deficits, the implicit debt, including the $52 trillion owed to those receiving benefits and who have earned the right to benefits, will continue as implicit debt.
As long as implicit debt is acceptable, regardless of the amount, we are in the clear.
In addition, the government has the ability to spend payroll tax revenues now, and may never have to pay back the implicit debt.
That is a deal too good to pass up.
Don Levit
I don’t think that congress will make any meaningful changes until there is blood running in the streets. There are too many people out there that have too big of a stake in the status quo.
I like John’s comment about how hard it is to judge future health care costs. When I was in college, I always estimated how long it would take me to finish a project by doubling my estimate, and then adding 4 hours. That usually put me within 30 minutes of the actual time to completion.
Perhaps saving for medical and retirement is the same way. Add up what you think you’ll need, triple it (just for good measure), then add $400,000. (I once heard of an architect doing that for a construction cost estimate, and his number was within $100 of the final cost.)
John is an optimist. A VAT might be the worst of the ideas in the nightly news. Among genuine social engineers, a wealth tax is the real objective. Here the value of your home (over a certain value), your car ( again with a deduction), all your savings accounts, investments, land, and personal property like your furniture and electronic equipment would be taxed. It is not just a social planners dream, it is a reality in France for example. This is one of the motivations why the Administration has targeted MSAs, and IRAs in the new tax bill.
Doesn’t look good for the future. And the younger you are, the worse it looks.
The Fiscal Commission will cost approximately $500,000 to operate. I hope each Member of Congress is assessed a proportional amount of that cost, since the Commission is doing the work that Congress OUGHT to be doing. Instead of solving national problems, Congress is spending its time naming post offices and deciding how far one is allowed to fly on a plane leaving from Reagan National Airport.
On a more somber note, the Fiscal Commission will almost certainly suggest ways to generate more federal revenue (read: taxes). But it is not at all certain they will propose anything that will solve the unfunded entitlement crisis.
Jennie, are you unfamiliar with the tax distribution tables. High income taxpayers are bearing a greater share of the burden of taxation than ever before in recent history. And it’s 90% due to Republican tax policies. At the same time, almost half the population had been remosved from the tax rolls — the lower half.
Louis, how is the economy going to grow at 3.5% without capital injections? In case you haven’t noticed the Obama administration plans to tax the hell out of capital. Didn’t you hear Obama’s answer on this during the election. He is for a higher capital gains tax on principle — even if it doesn’t raise any additional revenue.
Sorry Jennie, American jobs “going overseas” had nothing to do with the tax reforms of Reagan. The supposition that it did would be best described as “Voodoo Economics.
The answer to getting back on track is to concentrate on policy to make the economy grow, not punish those on top of the economic scale. Try to envision the economy as a dynamic, ever changing phenomenon instead of a static defined amount of money that must be managed like a trust account. Until you accept the reality of this you will never be able to understand “how on earth there can be entitlement reform”.
So I have a question. England, France, Canada, and other countries have communised medicine (let’s stop the euphemism of calling it socialized medicine). Their economies still exist. What I want to know is this: Suppose we retain all the current schemes – Social Security, Medicare, and Medicaid – as they now exist. Suppose all levels of government also continue to do everything else they new are doing – running schools, providing national defense, and so on. What fraction of the economy would government have to collect in taxes to pay for all that, assuming no more deficits and no finance by printing money (i.e., assuming truly balanced budgets)?
Bruce, I think Jennie’s main idea was that the progressive tax rates of the New Deal consensus were eliminated following the Reagan Revolution. This is supported with a historical examination of the tax table. Please see towards bottom of this link for top marginal tax rates in the 60’s and 70’s. (http://en.wikipedia.org/wiki/Income_tax_in_the_United_States) This was a significant loss of government revenue. Debt can be eliminated through either cuts in entitlements or greater taxation, neither of which are popular.
The government health care bill will have increased because thousands of American citizens don’t have jobs.
These people have a right to be added to the health care. I think the health care will crash if they do.
Maybe then Congress will agree to go on the same health care bill that American will have.
Maybe not– they will probably add Mexico ciizens which will increase our debts and let American citizens and their children go hungry and become homeless.
I wish more of our citizen would use common sense and realize what is going with our country.
We need to bring our service guys home so they can protect our borders. They will be safer here and so will we. That is if Obama quits giving up the things that protect us!!!!! I