The New CBO Report: Medicare Really Is Looking Better, But Not Good Enough

by Andrew Smith

The Congressional Budget Office released their update to the Budget and Economic Outlook for the next decade Wednesday. Damian Paletta has a summary for the Wall Street Journal, but here are are three big takeaways for thinking about policy choices in the coming years:

1. Deficits are returning to normal levels, but not for long.

According to the CBO, this year’s deficit will fall to 2.9 percent of GDP – smaller than the historical average – and the deficit will shrink again in 2015, too. This reflects the natural fall in spending and increase in revenues one can expect coming out of a major recession, and when considering that mandatory spending (for entitlements like Social Security and Medicare) is up 4 percent this year to $79 billion, the fact that the immediate budget is improving is impressive (though some of the cuts we’re seeing, to the Pentagon, are controversial).

The problem, of course, doesn’t lie in 2014 or 2015, but further down the road when Social Security and health-insurance programs drive our deficits and debt to unsustainable levels. This CBO report shows that climb is set to begin in the next decade, with deficits rising from 2.9 percent of GDP to 4 percent of GDP in 2024, with 85 percent of the increase in outlays coming from Social Security, Medicare and the medical programs, and interest payments on the debt.

2. The CBO projects the labor market to recover, but has its doubts about long-run GDP growth. Obamacare has something to do with it.

One of the most important debates within the Fed and among policy wonks concerns the trajectory of the labor market: Does the combination of demographic shifts, long-term unemployment’s scarring effects, and stagnant wages mean that for the foreseeable future we’re guaranteed lower levels of employment? Or is the low labor-force-participation rate and elevated unemployment rate the result of “slack” in the economy that could be addressed with better economic performance and further monetary stimulus?

In some ways, the CBO takes the latter view — citing a labor-force-participation rate below what demographics would project and a large number of part-time workers who would prefer full-time hours – and expects that faster economic growth will reduce the slack and push the unemployment rate down to 5.7 percent by 2016. But that’s partly because it doesn’t expect the labor-force-participation rate to recover: Increased demand for labor on one side will be outweighed by the continued aging of the population and Obamacare’s work disincentives, resulting in the rate’s dropping another half a percentage point between now and 2017.

In terms of economic growth, the CBO expects this year’s growth number, hampered by a rough first quarter, to be a paltry 1.5 percent. Activity will pick up in 2015 and 2016, returning to over 3 percent growth. But then through 2024, growth subsides to 2.2 percent, an anemic pace well below our historical average. That lower growth rate is in large part due to a smaller labor force, caused by aging and changing work incentives.

3. Medicare’s in better shape for now, but still in trouble down the road.

The CBO projects that Medicare spending will rise from 2.9 percent of GDP to 3.2 percent in 2024. To put this in perspective, the following graph from the Upshot shows revisions the CBO has made in their estimates for projected growth in Medicare spending: They’ve been dropping noticeably and consistently. Medicare is in better fiscal shape than we used to think, at least over the next ten years. (Click through to the piece to see the graphic animated.)

This is unquestionably good news, but it’s important to remember two things” First, to those cheerleading the projections as evidence of the success of Obamacare in bending the cost curve, the data would seem to say that the spending reductions are driven mainly by global trends toward slower health-cost growth – likely a result of the economic slowdown – and, as the NYT’s Margot Sanger-Katz and Kevin Quealy argue, naturally occurring “technical changes” in the health-care profession, e.g., more generic drugs.

Second, the economy will pick back up, inspiring more health spending and the aging of America will continue to age putting more pressure on the program. As Jim Capretta notices, the long-term picture is still bleak: “The program has $28.1 trillion in unfunded liabilities over the next 75 years. Together with Social Security’s $13.3 trillion shortfall, it is clear the federal government has accumulated entitlement spending commitments that far exceed our capacity to pay for them.”

Capretta maintains that the fee-for-service nature of Medicare causes inefficiency and excess spending and that its price controls distort the market while not doing anything to limit the use of services.