Wednesday, February 03, 2010

Generations and entitlements

Conservatives in the U.S. have recently been pushing for entitlement reform. The two biggest entitlements in the U.S. are Social Security and Medicare. In addition, Sen. McCain called the stimulus bill a "generational theft". There seems to be a persistent line of thinking among conservatives that present generations, by running up debt that we cannot repay, are stealing from future generations.

In addition, David Brooks, the resident conservative columnist at the New York Times, tells a story about what he calls the Geezers' Crusade:

The research paints a comforting picture. And the nicest part is that virtue is rewarded. One of the keys to healthy aging is what George Vaillant of Harvard calls “generativity” — providing for future generations. Seniors who perform service for the young have more positive lives and better marriages than those who don’t. As Vaillant writes in his book “Aging Well,” “Biology flows downhill.” We are naturally inclined to serve those who come after and thrive when performing that role.

The odd thing is that when you turn to political life, we are living in an age of reverse-generativity. Far from serving the young, the old are now taking from them. First, they are taking money. According to Julia Isaacs of the Brookings Institution, the federal government now spends $7 on the elderly for each $1 it spends on children.

Second, they are taking freedom. In 2009, for the first time in American history, every single penny of federal tax revenue went to pay for mandatory spending programs, according to Eugene Steuerle of the Urban Institute. As more money goes to pay off promises made mostly to the old, the young have less control.

Third, they are taking opportunity. For decades, federal spending has hovered around 20 percent of G.D.P. By 2019, it is forecast to be at 25 percent and rising. The higher tax rates implied by that spending will mean less growth and fewer opportunities. Already, pension costs in many states are squeezing education spending.

In the private sphere, in other words, seniors provide wonderful gifts to their grandchildren, loving attention that will linger in young minds, providing support for decades to come. In the public sphere, they take it away.

George Will, writing for the Washington Post, made a similar argument.

I myself am under 30 and I cannot deny the importance of investing in our young. And yet, it strikes me that this generational war rhetoric is off-base.

Most of the long-run U.S. deficit is attributable to the fact that health care has historically grown about 2% faster than Gross Domestic Product, and organizations like the Congressional Budget Office assume it will grow at about GDP + 1% in the future. None of that growth is because Medicare's benefit structure is excessively generous. For example, the Congressional Research Service and Watson Wyatt Worldwide estimate that Medicare only covers about 76% of its' beneficiaries' medical expenses, compared to a typical health plan sponsored by a large employer that covers an average of 80-84% of claims. (Employer-sponsored plans with HMOs cover an estimated 93% of claims because HMOs, which have greater restrictions on the providers you can use, can also negotiate better discounts.)

The U.S. deficit isn't due to excessively generous entitlements. It's due to medical costs that are growing much faster than GDP. Advancements in technology are by far the biggest driver of medical spending growth, although growth in obesity rates are probably a close second.

People far wiser than I have said, health reform that brings spending growth down is entitlement reform. Social Security is not out of line with what other countries provide. Conservatives nervous about Social Security's effect on the budget would be better off arguing that the trust fund should be invested in a diversified portfolio of stocks and bonds like a pension fund, instead of having the U.S. government guarantee the trust fund's returns - indeed, one of the sample options that the National Academy of Social Insurance suggested to balance the trust fund was to gradually invest 40% of the trust fund in an S&P index fund.

Likewise, Medicare actually provides a smaller benefit than commercial insurance plans (albeit seniors are far more costly than working adults). Some seniors buy Medigap insurance, which is a private wrap-around product that covers some of Medicare's cost sharing. Cutting Medicare's statutory benefits is not the answer. Privatizing Medicare isn't the answer per se - the private companies would have to manage care far more efficiently than is presently done to overcome the hurdles that their higher administrative costs and marketing costs would impose. It would probably be impossible except for the best HMOs.

There are undeniable problems with the American education system. It is certainly true that at the state level, increasing Medicaid expenses are squeezing budgets. The second biggest item on state budgets (according to my memory) is education. Again, the solution is not to cut a critical safety net for the poor. The appropriate solution is health reform that drives down costs. The second appropriate solution may be for the Federal government to take on long-term care for the poor and/or to expand the use of long-term care insurance (possibly by starting a public long-term care plan like the CLASS Act).

To reiterate, the services that the U.S. provides for the elderly are not out of line with what other OECD countries provide. The services provided for the poor are probably worse. Those who think our entitlements are excessively generous are off-base. While some cuts may need to be made to the benefits (e.g. raising the retirement age slightly for Social Security), the Republicans' refusal to consider tax hikes along with benefit cuts necessarily means that benefits will have to be cut substantially. That would undermine the social compact that the government has made with its citizens and it should be off the table.

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