The Entitlement Programs are Not Going Bankrupt

A very common argument among the political right is that the entitlement programs, especially Social Security and Medicare, are in deep trouble, because Social Security (SS) will not be able to fund the full benefit amount by 2024 (Greszler 2013), and because SS had been running a $55 billion deficit in 2012, facing a $12.3 trillion unfunded liability (Boccia and Greszler 2013). The public trustee, Robert D. Reischauer, said that “under current law, both of these vitally important programs are on unsustainable paths” (CBN News 2013). A Medicare trustees report is stating that the Medicare hospital insurance trust fund is facing a depletion of funds by 2026 (Boards of Trustees 2013, 6). The Peter G. Peterson Foundation anticipates an increase of the Medicare, Medicaid, CHIP and health care exchange subsidies from the federal government to increase from 5.5% of GDP in 2010 to 17% in 2008, and for SS from 4.9% of GDP to 6.6% (PGPF 2012).

What these entitlement programs are apparently doing is to provide a permanent income subsidy for old-aged people from young workers, who themselves will not benefit from the program. The solution to the fiscal challenges to the SS program, according to the Heritage Foundation, would be to raise SS benefits by what is called the chained Consumer Price Index, which calculates a lower rate of inflation and less benefit increases; to increase the retirement age from currently 65; and to exclude rich people from collecting SS (Boccia and Greszler 2013). The critics of social program (especially wealthy funders like Peter Peterson or the Koch brothers) reason that benefits have to be cut now, or they will be cut later. But either way, the revenues will not be enough to cover the expenses.

While all these numbers about these entitlement programs sound very scary, the fears about the programs are largely misplaced. It is important to make a distinction between Medicare and Social Security. It is easier to deal with SS first. In 2011, the income of the SS trust fund was $805 billion, and the expenditure was $736 billion, which offers the trust fund a handsome surplus of $69 billion. There are $2.7 trillion in assets in the SS trust fund, and under current projections will not be exhausted until 2033 (SSA 2012). One should not be too worried about the $12.3 trillion in unfunded liabilities, because the assumption of unfunded liabilities includes a future horizon of 75 years, in which many things can change, which are not included under current assumptions. (In the case of the 20th century, that would include the Great Depression and two world wars, among other things.) Unfunded liabilities also assume the full payment of all SS obligations with the present income, and is therefore an actuarial tool which is both misleading and unnecessary. The Academy of Actuaries writes that including unfunded obligations in the SS report “provide[s] little if any useful information about the program’s long-range finances and indeed are likely to mislead anyone lacking technical expertise in the demographic, economic and actuarial aspects of the program’s finances into believing that the program is in far worse financial condition than is actually indicated.” (Klieber 2003)

But then there are still two more counter-arguments by critics. The first is that despite the current surplus, SS is soon going into deficit, and in 2033 the benefit amounts will have to be cut dramatically, which explains the need for immediate reform, i.e. early cuts that are supposedly smaller. The second argument is that the positive assets in SS trust fund ($2.7 trillion) are all loaned out to the federal government, which finances other programs with the reserves from the trust fund. That means that even if SS’ outlook is not as bad as predicted, the government will have a hard time in repaying SS trust fund with interest.

My response to the first critique would be that the financial limitation to the future sustainability of SS is a political decision. For example, under current regulation, there is a cap on the payroll tax, which funds the SS system. Only the first $113,700 of worker’s annual earning are subject to the payroll tax, making the payment maximum $7,049 (Tax Policy Center). The assumption is apparently that rich people do not require as much in SS. So if there is a cap in the maximum benefit one can draw from SS (about $30,000 per year), there should also be a cap on the maximum taxes that should be paid toward it. I don’t accept that logic. There should be no problem in taxing a rich person proportionate to his income, and at the same time cap the maximum benefit amount in order to enable the long-term solvency of the SS program. My response to the second critique is that while most if not all of the assets in the SS trust fund are lent out to the American government does not mean that they will not be repaid. In the last report, the SS trust fund earned a 4.4% interest on the fund it had lent out to the government to finance current operations. Currently, the US government owes a lot of debt to creditors (about 100% of GDP by now), but no one so far has questioned the credibility of the US government in part because the US is the largest economy in the world, and in part because it harbors the world reserve currency, which is another way of saying that it will continue to find buyers of US debt in the foreseeable future.

The criticism of the viability of the Medicare program is somewhat more far-reaching. Medicare currently takes up about 3.6% of the nation’s GDP, but expensive treatments and an aging population continue to raise the cost pressure on the medical system in the US. But the rise in Medicare expenditures have to be viewed in context with the rise in expenditures in the US health care system as a whole. Part of the efforts of Obamacare was to reduce the growth of health care costs. (I will leave an evaluation of the reform proposal to other commentators, or deal with it in a later post.) The US has higher health care costs than many European countries. Europe spends about 10% of GDP on health care, in the US it is about 18%. The reason why health care costs are so high in the US relative to other industrialized countries is because of the privatized nature of the health care system, not because of the public provision of health care for the old, i.e. the Medicare system. The overhead costs for Medicare average about 2%. For the health care system as a whole including the private health care companies, who rely on profits to function, it is 14% (Wikler, Basch and Cutler 2012). A report by McKinsey Global Analysis finds that health administration and insurance accounts for 21% of the excess spending, while 85% of that excess spending is attributed to the highly complex private health insurance system in the US (Reinhardt 2008). This excess spending might be the reason why Aetna CEO Mark Bertolini saw his executive compensation quadruple from $9.7 million in 2011 to $36.4 million in 2012 (excluding the stock options) (Sturdevant 2013). Stephen J. Hemsley, CEO from United Health Care, was the eighth-highest paid executive in America, receiving $48.8 million in 2012 (Forbes).

If people argue that the costs for Medicare are high, then the question is high compared to what? The US health care system as a whole is too expensive for patients and taxpayers, and the solution would be to pick the health care system with the lowest administrative cost and the most comprehensive insurance provision for all people in this country. It would be most accurate to say that since Medicare’s cost of administration are lower than the private system that the solution is to expand Medicare coverage to the whole population, which will reduce overall administrative costs while guaranteeing access to health services to all residents. Businesses will also be relieved from the direct burden of paying for their employee’s health care. Obama’s delay of the employer mandate, and hundred other tricks to play cat and mouse between the government and the businesses would also end. Medicare will then take up more than 3.6% of GDP as it currently does, but the relevant comparison is the 18% of GDP, which is the cost of the entire health care system. If a universal Medicare program can be created at less than the cost of the current health care system, then it is a worthwhile endeavor to provide universal coverage through Medicare.

So if the bankruptcy of Social Security and Medicare are out of reach and can be fixed by some policy tweaks the relevant question is who has an interest to make a case for the impending bankruptcy of the entitlement programs, and the necessity of the impending cuts to these two social programs. The answer is that there are some wealthy interests in this country, who do not want to see functioning social programs, creating the not unjustified expectation in the population that the government can do good things for the people, and therefore demand more social programs to benefit them. With the threat of impending bankruptcy, the cuts to SS and Medicare can be made palatable to the US public. The second reason is that these wealthy interests simply do not benefit from these programs, because they do not rely on it. The third reason is that the rich are afraid that with the fiscal crises building up in municipalities (bankruptcy of Detroit etc.), states and the federal government, rich people themselves will be taxed more to shore up social programs. Fourth, in the case of Social Security it is pretty evident that Wall Street investors want to have access to SS funds of seniors, because it is one of the last remnants of a quasi- defined-benefit plan, of which there are not many left in America. In 2005, George W. Bush tried and failed to convert SS into a defined-benefit plan, which would have allowed Wall Street investors to have access to the private retirement accounts of working people, so that the investors determine where the money goes. It would have exposed working people’s retirement income to the vagaries of the stock market, as much of the defined-benefit plans have been, without guaranteeing a guaranteed stream of income, which is the corner stone of the current SS program and the last remnants of other defined-benefit pension plans. If we want to secure a good retirement to our old people, then the solution would not be to cut SS, but to expand it sufficiently so that a private need to ensure a decent retirement is made redundant.

References

Boccia, Romina, and Rachel Greszler. 2013. “Social Security Trust Fund Reports Massive Deficit, Benefit Cuts by 2033.” Heritage Foundation, Issue Brief No. 3952. http://www.heritage.org/research/reports/2013/05/2013-social-security-trust-fund-reports-massive-deficits-benefit-cuts

Boards of Trustees. 2013. “2013 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds.” http://downloads.cms.gov/files/TR2013.pdf

CBN News. 2013. “Top Government Entitlement Programs in Trouble.” June 2. http://www.cbn.com/cbnnews/us/2013/May/New-Report-Top-Government-Entitlement-Programs-in-Trouble/

Forbes. “America’s Highest Paid Chief Executives.” http://www.forbes.com/lists/2012/12/ceo-compensation-12_land.html

Greszler, Rachel. 2013. “History Suggests Social Security Insolvency is Coming Sooner than Projected.” Heritage Foundation, Issue Brief No. 3980. http://www.heritage.org/research/reports/2013/06/history-suggests-social-security-insolvency-is-coming-sooner-than-projected

Klieber, Eric J. 2003. Letter to Trustees of Social Security Administration. American Academy of Actuaries, December 19. http://www.actuary.org/pdf/socialsecurity/tech_dec03.pdf

PGPF. 2012. “Federal Entitlement Programs are Projected to More than Double as a Percentage of GDP under Current Policies.” Peter G. Peterson Foundation, June 1. http://www.pgpf.org/Chart-Archive/0027_entitlement-programs-proj

Reinhardt, Uwe. 2008. “Why Does U.S. Health Care Cost So Much.” New York Times, November 21. http://economix.blogs.nytimes.com/2008/11/21/why-does-us-health-care-cost-so-much-part-ii-indefensible-administrative-costs/?scp=2&sq=Uwe%20Reinhardt&st=cse&_r=0

SSA. 2012. “Social Security Board of Trustees: Projected Trust Fund Exhaustion Three Years Sooner than Last Year.” Social Security Administration, April 23. http://www.ssa.gov/pressoffice/pr/trustee12-pr.html

Sturdevant, Matthew. 2013. “Aetna CEO Mark Bertolini’s Pay More than Tripled Last Year.” Hartford Courant, April 8. http://courantblogs.com/ct-insurance/aetna-ceo-mark-bertolinis-pay-more-than-tripled-last-year/

Tax Policy Center. “Payroll Taxes.” http://www.taxpolicycenter.org/taxtopics/Payroll-Taxes.cfm

Wikler, Elizabeth, Peter Basch, and David M. Cutler. 2012. “3 Strategies for Reducing Health Care Administrative Costs.” Center for American Progress, June 11. http://www.americanprogress.org/issues/healthcare/news/2012/06/11/11805/3-strategies-for-reducing-health-care-administrative-costs/

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