Brief Note on Global Budgets and Defined Benefit vs. Defined Contribution

by Reihan Salam

Clive Crook writes the following:

In a riskier world, and one where industrial-country demographic trends are unfavorable, public support for pensions and health care will need to be increased. In the U.S., the Republican Party has set its face against this. Its plans to contain the fiscal burden of Medicare, for instance, involve a gradual shifting of cost and risk to the system’s beneficiaries — adding to rather than offsetting the pressures that the economy will bring to bear in any event.

What he doesn’t recognize is that the Wyden-Ryan proposal, like Domenici-Rivlin proposal, is based on a very different premise, i.e., that today’s benefit will be preserved, yet that a global budget will be used as a backstop to protect taxpayers. The idea behind competitive bidding is that it will encourage providers, including public providers, to offer today’s benefit at lower cost. Crook’s critique applies to earlier versions of the Ryan Medicare reform than it does to its latest iteration, which makes the same assumptions regarding Medicare cost growth as the president’s budget. To the extent that there is a gradual shifting of cost and risk to the system’s beneficiaries, Republicans are moving in lockstep with the White House.