The Ripon Forum

Volume 45, No. 2

Spring 2011 Issue

How to Fix our Entitlement Crisis: A Workable Four Step Plan

By on October 20, 2014

by TEVI TROY

A recent feature in the Washington Post highlighted the essential challenge we face with respect to entitlement programs.

According to the Post, “by 2020, spending on Medicare, Medicaid, and Social Security and interest on the debt will usurp much of the revenue from federal taxes, leaving other government expenditures . . . to be paid for with borrowed funds.”

For a long time, people warning about the coming entitlement onslaught seemed like Chicken Littles referring to a remote and far off event. 2020, in contrast, is not very far away. A fourth grader today will either be entering college or the work place by the time the point at which entitlements and interest will have completely captured the budget, unless something is done about the problem in the immediate – and I do mean immediate – future.

It is this “unless” that is flummoxing Washington these days. To review: President Obama ignored this problem when he released his budget in February, effectively daring the Republicans to go first with a proposal. The Republicans did just that, with Paul Ryan’s framework. At this point, Obama, recognizing that he could ignore the entitlement crisis no longer, then sought a budget “mulligan,” coming out with a speech in which he laid out some relatively vague ideas for addressing the problem. To fix the problem, however, presidential leadership is a must. Waiting for the other side to go first so that they get hit with more flak is a form of “leading from behind” that is unlikely to generate the type of serious reforms we need.

To fix the problem … presidential leadership is a must. Waiting for the other side to go first so that they get hit with more flak is a form of “leading from behind” that is unlikely to generate the type of serious reforms we need.

Each of the three main entitlement programs – Social Security, Medicare, and Medicaid – are very different in both goal and design, and need to be examined and reformed individually, even if all of the reforms come as part of a larger deal or package. When I served as Deputy Secretary of Health and Human Services in the Bush Administration my boss, HHS Secretary Mike Leavitt, used to say that Social Security is a math problem, but Medicare was far more complicated.

He’s right, and the solutions that will help with one program differ from the options available for the others.

The Path to Reform

With respect to Social Security, a recent graph in the Wall Street Journal has showed that we are already at the point where annual outlays are outpacing receipts. According to the chart, this problem is going to steadily worsen between now and 2040. But we know that Social Security is fixable because it has been fixed before, giving us a model for how to proceed. In 1983, the bipartisan commission led by Alan Greenspan helped initiate a series of reforms aimed at keeping the system solvent for 75 years. While this effort did not attain its full 75 year goal, it did extend the time before we faced another Social Security crisis, and did so in large part by extending the retirement age and adjusting future benefit levels. However policy makers choose to adjust the Social Security formula, the key point is that fixing Social Security is a doable endeavor by changing the mix of retirement age and benefits, without necessarily changing the character of the program.

With both Medicare and Medicaid, however, more significant fixes — which go beyond simple, if politically challenging, mathematical tinkering — will be required. The essential problems with Medicare are that the costs of health care continually grow faster than that of inflation, and that the Medicare benefits are largely open ended. There is no fixed annual budget for Medicare, and while costs keep rising every year, beneficiaries have little incentive to keep costs in check. This is why the idea of making Medicare into a defined benefit, also known as premium support, is so difficult.

With both Medicare and Medicaid, however, more significant fixes — which go beyond simple, if politically challenging, mathematical tinkering — will be required.

Despite President Obama’s rhetoric about reining in the costs of health care, the issue of health care inflation is largely out of direct government control, so President Obama’s idea to extend Medicare via an outside price commission – the Independent Payment Advisory Board, or IPAB – is unlikely to succeed. A better approach is to add more predictability to the system, for both future seniors and the government, by providing assistance for Medicare recipients to purchase insurance on their own, and to protect the government from the vagaries of the health care inflation index.

With respect to Medicaid, the problem here is that the federal government pays for part of the program — the states pay the rest. Moreover, the federal government limits state flexibility in setting up and running programs as the state sees fit. The federal government also often adds new obligations, as it did by putting approximately half of the anticipated new entrants to the rolls via the new health care bill on Medicaid. Approximately 16 million people will be added to the Medicaid rolls as a result of the Obama health law, further challenging already strained state budgets.

To address this problem, the federal government needs to give states more flexibility and more authority to run their Medicaid systems. This is often derisively called a block grant approach, but the truth is that this approach will be better for the states and for the federal government. The interaction will be more limited and cleaner, and states will know that the systems are theirs to run, with limited interference from Washington. People on both sides of the aisle recognize that this type of reform is likely to take place.

I was on a recent panel discussion in Washington where participants across the ideological skepticism were asked about the prospects for block granting Medicare, and I was shocked at how little objection there was to the idea. The representative from the Obama Administration issued a brief pro forma objection at the end of his comments, but the relative lack of ire that the concept raised indicates that this idea may be more politically attainable than previously thought.

An Area of Possible Compromise – and Revenue

The last aspect of the challenge we face is on the revenue side, and here there is some good news in that Ryan, Obama, and the bipartisan fiscal commission all agree on the need to reduce what are known as tax expenditures. The bipartisan fiscal commission, in fact, found that various breaks and subsidies in our tax code cost the U.S. Treasury over a trillion dollars annually. In addition to the direct costs of these subsidies, they also complicate the tax code, make filling out your taxes a lengthy, expensive, and painful process, and foster tremendous economic inefficiencies.

As former Chairman of the Council of Economic Advisors Martin Feldstein has noted, our “tax code is full of special features that reduce revenue, [which] are really forms of government spending that have been built into the tax code.” According to Feldstein, “These special features — known as tax expenditures — add more to the deficit each year than all the non-defense discretionary spending in the budget.”

In undertaking this effort to raise revenues by cleaning up the tax code, the Reagan administration experience is once again instructive: in 1986, President Reagan pushed a bipartisan tax reform that cleaned up our tax code and reduced income tax rates, which had the happy effects of both raising revenues and boosting our economy. President Obama would couple this with raising taxes by allowing the Bush tax cuts to expire. This additional step is unnecessary.

Eliminating the vast majority of expensive tax code subsidies will both raise revenues and help our economy.

Contrary to those who fear that addressing spending means stepping on some kind of political third rail, polls show that the American people are ready to take some of these difficult steps. According to a Resurgent Republic poll, for example, 89% of Americans oppose increasing the debt ceiling without cutting spending. Furthermore, there is historical precedent for getting our debt under control by taking a series of measured, non-radical steps to control spending and maintain revenue levels.

According to Feldstein, “It is worth remembering that after World War II we brought our national debt down from 109 percent of GDP to 46 percent of GDP in 1960. We did it by avoiding any growth of the government’s debt during those years — that is, by balancing deficit years with surplus years.”

This effort is not just doable, though. It is also necessary.RF

Tevi Troy is a Senior Fellow at the Hudson Institute. He has served as the deputy secretary of Health and Human Services and a senior White House aide.

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