One of the most influential ideas in Washington these days is that Social Security and Medicare are on the verge of going bust. Earlier this month, Senator Lindsey Graham warned of the “imminent bankruptcy” of these insurance programs for the elderly, and Republican leaders are citing the threat of insolvency as a reason that entitlement reform must be part of any fiscal-cliff deal. The argument sounds reasonable enough, but it’s really a bid to turn the great political strength of these programs—the fact that they were designed to be self-supporting—into a weakness.Unlike most government programs, Social Security and, in part, Medicare are funded by payroll taxes dedicated specifically to them. Some of the tax revenue pays for current benefits; anything that’s left over goes into trust funds for the future. The programs were designed this way for political reasons. When F.D.R. introduced Social Security, he calculated that funding it through a payroll tax rather than out of general tax revenue would make people think of the program not as welfare but as an entitlement—as something that they had paid for and had a right to. Many liberals initially opposed the idea, because payroll tax rates aren’t progressive (everyone pays the same rate) and because they tax only labor income. But the system proved as resilient as F.D.R. had predicted, and when Lyndon Johnson introduced Medicare, in the nineteen-sixties, he adopted it, too. Over the years, Social Security and Medicare taxes have risen sharply, to the point where payroll taxes account for thirty-six per cent of all federal revenue. Today, most American households pay more in payroll taxes than in income tax. Yet there’s little public hostility to these taxes, and the programs they fund remain enormously popular.
But the trust-fund strategy has an Achilles’ heel: funds can run out of money. Projections show that, owing to an aging population and rising health-care costs, the Medicare Trust Fund will become insolvent in 2024 and Social Security in 2033. The image of empty coffers is a powerful one: half of all Americans aged between eighteen and twenty-nine don’t think that Social Security will exist when they retire. That’s a bizarre thing to believe about an important government program. No one ever says, “I don’t think the U.S. Army will be there when I get old” or talks about the Defense Department “going broke.” We assume that there will always be a need for the military, and that we’ll end up paying the taxes that are necessary to fund it. But, because Social Security and Medicare have always been self-supporting, it’s easy to believe that they’ll just vanish if the trust funds dry up. This isn’t the case. Relatively minor tweaks to Social Security will allow it to keep paying full benefits for many decades. And, if we wanted, we could supplement funding for both programs with general government revenue. That’s what most European countries do, and, indeed, parts of Medicare are already paid for out of general revenue. The only way that Social Security and Medicare can go “bankrupt” is if we let them.
So why are politicians obsessed with the question of solvency? Because it makes cutting entitlements seem inevitable, rather than a political choice. After all, if you’re in favor of cutting entitlements, that means you’re in favor of spending less money taking care of old people. That’s a tenable position, but it’s politically dicey—particularly for Republicans, since the elderly are among their biggest supporters. It’s far more palatable to argue that we simply have to cut benefits, because otherwise the programs will go bankrupt. That’s why when, in 2011, Paul Ryan introduced a plan to effectively replace Medicare with a voucher system he said that he was doing so in order to preserve Medicare for future generations. Hand-wringing about Medicare and Social Security going bust allows Republicans, paradoxically, to portray themselves not as opponents of entitlement spending but, rather, as its saviors.
This isn’t just a rhetorical problem. It leads to terrible policy. You can see that in the current debate over the proposal to raise the age of Medicare eligibility from sixty-five to sixty-seven, a proposal that, some have suggested, President Obama may agree to as part of a fiscal-cliff deal. This is not a good idea: though it would save taxpayers close to six billion dollars a year, it would raise over-all health-care spending by more than eleven billion dollars a year, according to an estimate by the Kaiser Family Foundation. (That’s because Medicare is better at holding down costs than private insurance, and because the out-of-pocket costs for ineligible seniors would rise.) Sure, it would extend the life of Medicare, but that’s meaningless on its own: you could extend the life of Medicare indefinitely if you restricted it to people over eighty-five, but that doesn’t mean it’s smart to do so. Only an obsession with the trust fund makes kicking people off Medicare seem like a rational approach to our health-care problems.
There are legitimate reasons to be worried about entitlement spending. But the fundamental question is not how much longer the Social Security and Medicare trust funds are going to be solvent. The question is how much we’re willing to spend to insure that the elderly have affordable access to health care and some financial security. The political virtue of the trust-fund strategy has been to make it seem as if Social Security and Medicare run on autopilot. But it has also meant that we’ve never had an honest debate about the value, and the cost, of social insurance. That’s the argument that politicians should be having, instead of a disingenuous one about solvency. ♦
Monday, December 17, 2012
The only way that Social Security and Medicare can go “bankrupt” is if we let them.
James Surowiecki at The New Yorker: