The Agenda

On Medicare, Save Money Now

House Budget Committee Chairman Paul Ryan (R) and Senator Ron Wyden (D) are out today with a joint proposal on Medicare reform, and structurally, the plan makes a lot of sense. The plan is built much like the “premium support” plan that Ryan has been advancing for the last year.

However, there are two key differences from Ryan’s original proposal. One is that traditional fee-for-service Medicare would be retained as a “public option” that seniors could choose, using their premium support payments to buy insurance from the government instead of from a private insurer. The other is that the plan does not include Ryan’s aggressive cap that would have held the growth in the value of Medicare benefits to CPI. As I wrote at the time, this was an implausibly low target, especially because the plan lacked accompanying cost-control measures. Wyden-Ryan aims to hold overall Medicare cost growth to GDP growth plus 1 percent, which is still ambitious but plausible.

I like this proposal structurally. What I don’t like about it is another feature it keeps from Ryan’s original plan–it wouldn’t be effective until 2022, and then only for new retirees. That means, like Ryan’s proposal before it, it saves no money this decade and almost no money in the next decade. I understand the political impulse–it avoids impacting anybody now, so maybe Ryan and Wyden won’t get beaten up for taking away Granny’s benefits. But this delay is still a serious mistake–reforms should be effective immediately, and for current participants as well as new ones.

First of all, if you touch Medicare, you’re going to be hit with “Mediscare” attacks. Saying he would delay effectiveness until 2022 didn’t stop Democrats from savaging Ryan’s plan as “ending Medicare as we know it.” No matter how many times you scream that your Medicare changes hold Granny harmless, your opponents will attack you for wanting to put her on an ice floe. If you’re going to take the hit, your plan might as well be effective right away.

Secondly, there’s no longer very much to hold Granny harmless from. A real problem with Ryan’s plan was that it was going to cause Medicare benefits to wither over time, with premium support payments becoming increasingly insufficient to buy an insurance plan. Wyden-Ryan avoids that situation–seniors would continue to get a payment that covers the cost of FFS Medicare or another plan that includes all the same benefits as FFS Medicare, on the same premium schedule laid out in the law today. You don’t need to exclude current seniors from this plan to allow them to live out the retirements they had planned on.

The downside of including current over-55s in reform is smaller than widely thought, but the upside is large. Indeed, “save money now” is the key lesson I draw from pension reform fights in states around the country.

In 2009, a lot of states passed “pension reform” that only changed benefits for newly hired employees, meaning that pension checks would start being smaller for a handful of workers around 2040. These reforms met little political resistance because current workers got to keep earning the same benefits as before. Lawmakers also found, to their chagrin, that the reforms saved trivial amounts of money in the current period. A lot of these states had to come back for another round of reform that would actually create current-period savings, and more recent pension reforms have been better.

Rhode Island just enacted the country’s most aggressive pension reform law, with big changes to the benefits that current workers will earn in future years and even reductions in the value of pensions currently being drawn by retirees. It sounds painful, and it is. But the law is popular– a Brown University poll out today finds 61 percent support. Public support for the law stems from the fact that it saves real money, avoiding the need for sharp tax increases and creating room in the budget to spend more on public services. Structured and sold correctly, these sorts of reforms do not have to be political poison.

The United States needs Medicare reform for the same reason Rhode Island needed pension reform–without adjustments, Medicare will eat the budget and make the rest of government dysfunctional. Fixing that problem should be a winning proposition, but you can’t fix it if reform is always something that has to happen “later.” Wyden and Ryan have hit upon a good structure, but they should seize the moment and urge its implementation today, not in 2022.

Josh Barro — Mr. Barro is the Walter B. Wriston fellow at the Manhattan Institute. His research is focused on state and local fiscal policy.


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