To address the rising costs of federal entitlement programs like Social Security, Medicare, and Medicaid, it’s important to know what is causing these cost increases to begin with. For years, the entitlement crisis was assumed to be driven by the aging of the American population, a trend that pushes 10,000 seniors per day onto benefit rolls without balancing them with taxpaying workers. Rising life spans and lower birth rates will permanently increase the ratio of retirees to workers, driving costs — and taxes — higher.
But this view, according to a narrative now dominant in liberal policy circles, is not correct. These critics note, accurately, that costs are rising too quickly for shifting demographics to explain them entirely. But this new narrative diminishes aging’s role too much, and opens the door to intrusive federal control over private-sector health care.
In the new entitlement narrative, Social Security is a bit player compared to Medicare and Medicaid. And within Medicare and Medicaid, the story goes, the real problem isn’t more seniors receiving benefits but price inflation — the growth of health-care costs in excess of the growth of the economy.
What’s more, health-care inflation isn’t a problem peculiar to Medicare and Medicaid but symptomatic of rising health costs economy-wide. Putting it all together, the Brookings Institution’s Henry Aaron declares, “there is no general entitlement problem. Rather, the nation faces a daunting health care financing problem that bedevils private insurers and public programs alike.”
This narrative demands not changes to Medicare and Medicaid, but a fundamental overhaul of private-sector health-care provision, whose rising costs transfer over to Medicare and Medicaid. As Obama budget chief Peter Orszag recently said, “Health-care reform is entitlement reform. . . . Reforms to Medicare and Medicaid will only succeed in the context of slowing the overall growth rate of health-care costs.”
More activist Democrats have picked up this ball and run with it, criticizing Obama for even considering working with Republicans on Social Security reform. This highlights that, while this new entitlement narrative is honestly held by some, it is also politically convenient. It puts unpopular Social Security reforms on the policy back burner and blames Medicare and Medicaid’s funding shortfalls on the private sector. Tough policy choices on Medicare and Medicaid, too, are unnecessary, as private-sector health reforms supposedly will lower costs within these programs. Perhaps most important, this narrative furthers many liberals’ goal of increasing federal influence over health care for working-age Americans. If doing so cuts Medicare and Medicaid costs, that’s a bonus.
But there’s an alternative view, backed by hard numbers, that allows for a very different interpretation. Congressional Budget Office projections show that population aging — not excess health-care cost growth — will be the biggest driver of overall entitlement costs until nearly mid-century. Over the next 20 years America will add eight seniors for each working-aged individual. This accounts for fully 60 percent of Social Security, Medicare, and Medicaid cost growth through 2029, and it is not until 2045 that health-care inflation will become the principal driver of entitlement costs.
The predominant role played by aging, which is obscured when Social Security costs are split off from those of Medicare and Medicaid, significantly undercuts the new narrative and implies that more traditional reforms remain important. Taxes, premiums, and co-pays must rise or benefits must shrink. Policy should encourage individuals to work longer, building savings for retirement and health expenses. Tax policy toward parents could encourage larger families that will support future entitlements. More slots for highly skilled immigrants, who would be net contributors to these programs, also merit consideration. More broadly, the traditional liberal view of universal “social insurance” programs paying benefits to rich and poor alike may have to give way to smaller, better-targeted approaches, complemented by increased personal saving.
This is not to say that policymakers should ignore health-care price inflation. Cost-benefit analysis can point individuals and insurers toward the best treatment value for the dollar. Eliminating the tax preference for employer-sponsored health care could cut costs by 10 to 20 percent, according to health economist Charles Phelps. Higher out-of-pocket costs, which have declined from half of total expenditures in 1960 to just 13 percent today, could increase incentives for cost-effective treatments. Such a reform, according to Obama economic adviser Jason Furman, could reduce health spending 13 to 30 percent without hurting results. Finally, with almost half of total national health care financed by the government, we can use reforms to Medicare and Medicaid to drive private-sector cost savings, rather than relying on private-sector reforms to lower government costs.
Most important, we should not rush to exert national control over private-sector health care in hopes of fixing rising entitlement costs, because our near-future Social Security, Medicare, and Medicaid deficits will result mainly from our graying population.
– Andrew G. Biggs is a resident scholar at the American Enterprise Institute.