Politics & Policy

Cost Conscience

The GOP's new drug benefit is a serious policy error.

Republicans think they are so clever, having rammed through a massive expansion of the welfare state by giving drug benefits to the elderly. They co-opted the AARP — long considered to be in the Democrats’ pocket — and left the Democrats with no real domestic issue to run on in 2004. Republicans think they’ve bought themselves an easy re-election next year, and for the low, low cost of just $400 billion over the next ten years.

In the very short run, they are probably right. As is the case with all entitlement programs, the benefits come first and the costs later. So, for a time, people believe they have gotten something for nothing. For many, this is literally true: The first Social Security recipients paid virtually nothing into the system, but got benefits forever afterward. For this largesse, which Democrats used to buy re-election in 1940, every working American now pays far higher taxes than would be the case if those first Social Security recipients had been forced to play by the same rules.

Same goes for the drug benefit, which doesn’t even really start until 2006 Between now and then there will be no premiums collected, no private benefits lost, and no one will see any of the other costs associated with the program. For two years, in other words, Republicans and their newfound AARP allies will be able to tell the elderly what a great thing they have done for them, without any fear of backlash.

But sooner or later, there will be a backlash. Many retirees with good drug benefits from their employers will lose them for inferior Medicare coverage. Premiums will be collected and drug prices will rise from increased demand, reducing affordability even as the new benefits kick in. Then, seniors will come up against the bizarre rules of the program, where some drugs are covered and some are not, depending on one’s income.

The Democrats, of course, will be there to explain every negative aspect of the program and exploit any discontent. Seniors will be convinced that Medicare would be problem-free if only Congress had adopted the Democratic plan instead of the Republican one. If seniors will only vote for Democrats, everything will be fixed and they will get all the drugs they want at no cost.

Republicans, on the other hand, will again play the role of the Grinch. They will try to explain that the benefits Democrats are promising do not come without vastly greater cost. But Democrats will counter with studies from liberal groups like the Center on Budget and Policy Priorities, with lots and lots of statistics that no reporter will ever bother to read, showing that lead really can be turned into gold. And seniors, upset that they didn’t get as much as they thought they were going to get, will turn on Republicans with a vengeance.

A good parallel is Richard Nixon’s decision to permanently index Social Security benefits in 1972. Until then, Congress had boosted benefits on an ad hoc basis from time to time, usually in election years. Indeed, benefits were raised 20 percent in 1972 on top of indexing. Contrary to popular belief, the original Social Security legislation never promised beneficiaries automatic protection against inflation.

Thus, in order to buy himself re-election in 1972, Nixon initiated a permanent, annual increase in Social Security benefits. Now, every year, Social Security beneficiaries get an automatic cost-of-living adjustment that increases their benefits. Do any of them give thanks to Richard Nixon for this? I think not. They simply take it for granted. The vast majority of the elderly undoubtedly believes that indexing has been part of Social Security since the beginning. If seniors thank anyone, it is probably Franklin Roosevelt.

Following Nixon’s ill-conceived vote-buying action, inflation shot through the roof. Social Security benefits went up far faster than Congress would have raised them under the old ad hoc system. And whenever Republicans suggested slowing indexing to help control the budget, they were denounced as heartless monsters, even though their party had delivered the benefit in the first place. Even when economists proved conclusively that the Consumer Price Index was overstating inflation, thus giving seniors an extra benefit to which they were never entitled, it proved impossible to reform cost-of-living adjustments.

Cost problems are inevitable in all entitlement programs. That is why experts warn against enacting them. Consequently, Republicans have not only made a serious policy error in enacting a new drug benefit, but a political one as well. Whatever short-run gain they have made will melt away once the costs explode — which they will. And any future Republican effort to restrain those costs will completely reverse this temporary gain. In the end, only Democrats gain politically from entitlement programs.

Members of the National Review editorial and operational teams are included under the umbrella “NR Staff.”

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