Have We Promised Our Senior Citizens More Than We Can Afford?

As the national debt increases, the cries for entitlement reform become louder and more frequent. One often hears the claim that we have promised ourselves more than we can afford. As expenses are projected decades into the future it becomes clear that unless something changes the costs of the Social Security and Medicare programs will consume a much larger fraction of the federal budget. This growth is partly due to the surge in retirees entering these programs as the baby boomers age, partly because medical costs are rising faster than GDP, and partly because the fall in incomes has diminished the expected flow of funds into these programs.

We must recognize that the question: "How much can we afford?" is really code for the real question: "How much are we willing to spend?"

Given that our society has not yet decided that our elderly will be allowed to die in the streets, and given that it is more efficient that they have enough funds to take care of themselves rather than have someone paid to take care of them, then it would seem that we must ensure that seniors have enough income to feed, clothe, and provide shelter for themselves. A reasonable societal goal might be to prevent a person who was not living in poverty as a worker from falling below the poverty line as a retiree. Consider this chart:

Financial analysts generally suggest that a retirement income of about 70% of preretirement income is necessary to maintain one’s lifestyle. None of these income levels receive anything close to the 70%. Social Security is intended to provide enough income to avoid dire poverty if one has no other source of funds. That is what it does. That is all it does.

Are Social security benefits needed? Consider this chart provided by the Economic Policy Institute

At least 60% of the elderly depend on their benefits for at least half of their income. Social Security benefits are said to prevent 40% of those over age 65 from falling into poverty. How does one argue that those benefits can be cut?

It has been claimed that Social Security is a Ponzi scheme. Actually the program has been on rather firm financial footing. Part of the reason revenue is below expectations is because no one anticipated that real wages would fall for most people. When the claim is made that the program will go bankrupt in whatever year is the current prediction, what it really means is that there will be a revenue shortfall of about 20% that will have to be made up from other revenue sources. That hardly qualifies as a bankruptcy.

Is it common knowledge that many people contribute more to the program in payroll taxes than they will ever receive in benefits? C. Eugene Steuerle and Stephanie Rennane of The Urban Institute have produced a useful compilation of taxes paid and benefits received by income and by year of retirement. In Social Security and Medicare: Collected Taxes, Benefits Received we summarized some of their data as it applies to those retiring at age 65 in 2011. Consider this summary table:

The ratio of benefits to taxes paid for Social Security is made more explicit in this table:

The only category that receives much more than contributed is the single-earner couple with modest income, a configuration that is becoming ever rarer.

Social Security was meant to be self-supported. It very nearly is. Only minor tweaks to the system are required to keep it financially sound. It makes no sense to cry bankruptcy, or to try to turn youth against the elderly by bellowing that the program will not be there when our children need it. And don’t lower benefits for those who really depend on them.

Medicare is a more complex issue. Currently, revenue comes nowhere near to covering costs. Consider this table:

Is this imbalance between costs and revenue caused by lavish benefits, or waste and inefficiency? Actually, Medicare is the most cost effective way of delivering healthcare. If it has a defect, it is its vulnerability to fraud. Quite a bit of money could be saved if fraud was eliminated.

　

Trying to save money by increasing the eligibility age, or by cutting benefits, or by providing vouchers, doesn’t really fix anything. Less money might be spent explicitly on Medicare, but by moving people from an efficient system to an inefficient system costs will go up and they will have to be borne by those least able to manage them. Dumping a lot of expensive elderly people into the commercial insurance market will either raise the medical insurance rates for everyone, or will require seniors to have separate plans with enormous premiums. Besides the pain and inconvenience suffered by the elderly, more of their income will be extracted from the general economy and dumped into our wasteful healthcare system. That does not make sense. It also makes no sense to provide them on one hand with sufficient income to keep them free of poverty, and then with the other put them at risk of financial ruin by withholding support for medical costs.

The major problem with Medicare is that healthcare costs are just too high. Other countries deliver better healthcare at half the cost. This is a problem for our entire society, not just the Medicare Program. The most effective way to bring those ratios in the above table closer to unity is by lowering costs. This is the path the Obama administration has taken by incorporating and encouraging inefficiencies into medical practice within the Medicare system. There is evidence that these actions are beginning to work as the growth in Medicare per capita costs has fallen considerably since the healthcare law was passed. There is also evidence that these methods are spreading to healthcare delivery for the general public. Encouraging results are being obtained.

Medicare is not a lavish or wasteful program. The best way to approach the cost issue is by reining in healthcare costs in general. That will probably not be sufficient. Medicare is already a progressive system in the sense that people with higher incomes pay Medicare payroll taxes at a higher rate, and they pay more for Medicare coverage when they become eligible. For those who can afford to pay more it is a tremendous bargain. Let them pay more if necessary.