The editors of the Washington Post say something I definitely agree with:
House Speaker Kevin McCarthy (R-Calif.) announced last week that cuts to Social Security and Medicare are “off the table†in negotiations over raising the debt ceiling. In so doing, he deprived Democrats of a political talking point and reduced the likelihood of national default. Raising the debt ceiling — and thereby preserving the full faith and credit of the federal government — should proceed without negotiations or strings, let alone a contentious debate about third-rail entitlement programs.
Yet the discussion needs to happen sometime, and sooner rather than later. These entitlements — which already account for about a third of federal spending — remain on unsustainable trajectories, and protecting them for future generations is too important to keep reform off the table indefinitely.
Medicare’s trust fund is projected to run short by 2028, and Social Security will exhaust its reserves by 2034. When that happens, seniors face an immediate 25 percent cut in benefits. Clamoring for bailouts will be intense, but the country will struggle to afford them — especially in the looming era of higher interest rates, which make it more expensive to service the national debt. The longer Congress puts off fixes, the more painful they will become for the 66 million seniors, and growing, who receive monthly Social Security payments and the approximately 59 million people enrolled in a Medicare plan.
and the more damage will be done to the national economy. As I’ve said the next Social Security Trustees Report, due in May, will be interesting. I expect it to pull both trust fund depletion dates forward (from 2028 and 2034, respectively).
Simply doing nothing will cause the Medicare reimbursement rates and monthly Social Security retirement checks to be decreased sharply. Paying the shortfall out of the general fund will inevitably monetize the shortfall and will contribute more to our present bad balance sheet. That both should be abolished and we should let the market provide is a fantasy. We already know what happens when the market provides. Many seniors are left with a choice between health care and eating. Raising the tax rates is regressive and, honestly, there aren’t enough workers who pay the tax as it is. It will increase the temptation to pay workers “under the table” in one way or another, e.g. employing illegal immigrants who don’t pay those taxes at all. There are no really good, attractive options which is why even talking about reform is a “third rail”.
The unfortunate political reality is that neither party nor our political system generally, will do anything until there is no other choice. The necessary decisions involve too many third-rails.
Well, I wouldn’t worry about monetizing the shortfall. Since both programs have inflation protection clauses, even monetizing deficits causing high inflation won’t reduce their real cost; so its not a viable option for lawmakers.
Don’t discount doing nothing; by 2028 it could be the least painful option politically for Congress compared to all the others.
That’s the effective equivalent of my first alternative—letting Medicare reimbursement rates and Social Security checks decrease sharply. How much is “sharply”? According to the SSA initially it would be about a 25% decrease. That would be a pretty big shock to retirees living from Social Security check to Social Security check. Estimates vary—from between 12% and 40% are believed to live that way. That’s something between 8 million and 24 million people.
steve may have some insights into the effect that a 25% cut in Medicare reimbursements would have on the health care sector. I don’t think it would be apocalyptic but I do think it would hurt.
I see the problems of social security and medicare as pretty different.
Social security is more solvable as how it functions in practice is as a redistribution program (from active workers to the retired). Unless the law that everyone dies is repealed; whatever we take from active workers to the retired to close the hole will in aggregate be returned to active workers when the retired pass on. In some sense, the solution is a parody of the prodigal son where the father borrows from the son only to give it back as inheritance later.
Medicare is different in that it is a promise to provide a certain amount of health care and the deficit is the accounting manifestation that it exceeds the actual capacity of the country to provide it. It is entirely possible the Federal Government raises the mathematical amount in new taxes but without a corresponding increase in capacity, the actual health care people get decreases.
In conclusion I think Congress can solve social security by a combination of tax rate increases and increase the in amount of taxable wage subject to it. Medicare I think there won’t be a solution unless there is health care reform.
There are many more differences between Medicare and Social Security than that. If it were as you say, a promise to provide a fixed amount of care, it would eliminate some of Medicare’s problems. It’s more open-ended than that. Additionally, health care is practically the only sector that creates its own demand.
WRT Social Security I don’t know how high you’d need to raise FICA max but you’d also need to adjust the benefit formula. Not only would that be politically fraught but, just as with the income tax, you can’t guarantee a certain amount of revenue by increasing the amount of income subject to the tax.
One thing can be predicted with absolute certainty is that will be no cuts in either Social Security or Medicare benefits. Any deficits will be made up from general revenues. You might recall that the Trusts’ surpluses were transferred to general revenues, and spent for current needs. (The same thing has happened to the federal Highway Trust Fund, otherwise known as the gas tax.)
This is not merely an issue of the elderly voting disproportionately, their children and grandchildren absolutely will not tolerate any cuts. They depend on SS and MC to help support their elderly parents who might be living with them.
How Congress deals with financing the shortages is unknown. Most likely they will try to borrow the money needed. The problem is that no program can be cut, not one. Congress won’t even freeze increases at cost of living increases. All programs’ funding must increase at rates higher than inflation.
The Ukrainian war will likely collapse America’s empire, and end the dollar’s reign as the premier reserve currency. Then it will hit the fan.
A sudden 25% cut would be catastrophic I think. Many hospitals, especially rural ones, would go under right away unless bailed out. However, if done gradually and with planning it could be survived but we would end up with more of dual tier system I think. The gap between private and Medicare spending would be huge, though I am betting private insurers would also pay less since all they need to do is maintain a small differential so that private pts are sure to receive care.
A gradual, planned reduction would be what we call health care reform. Its really not going to be lead by the private insurers as they are so focused on market share. There would need to be significant cuts in salaries and I think we wouldn’t be so generous with elective care. Joint replacements would be done more out of need and less because they are money makers as an example. We would stop paying so much for drugs with minimal benefits and maybe even allow price competition. Fewer MRI scanners. Not sure how many FMGs want to come here if pay decreases so would need to address that. *
The politics would be horrible. Who is going to tell the 65 y/o they cant have a hip replacement so they can golf better and more often? Those are the people who vote. I expect there to be some efforts to cut Medicaid as those are young people who dont vote and they are more often minorities. Whichever party actually passes meaningful health care reform will likely lose the next election(s).
Steve
* Really too long and complex to cover quickly but lets take a couple of examples. Nursing home care. Roughly 2/3 of nursing home costs are personnel costs. However, that’s mostly lower level personnel. 25% cuts for those people are harsh and I would expect many to seek other work. Nursing home care is roughly 5% of total health care spending.
Hospital care accounts for about 1/3 of health spending and about half of that is personnel. Over time you can cut some non-personnel spending but a lot of that will be hard to do much about. If you try to do it be personnel cuts alone you are looking at 50% cuts. The $800,000/year ortho doc can afford that but it means the $200k pediatrician is making $100K after leaving med school with $300k debt and working 50 hour weeks including weekends and holidays. I dont see that as especially desirable for many people. The average nurse goes to $38k, just a bit above minimum wage in the places where it is $15/hour, and it often means shift work. It puts PCA pay well below minimum wage, which is not doable. So all of that means you cant just do across the board cuts, which is the simplistic way you often see politicians approach it. So it will be complex and nuanced, not what our politicians are good at.
The obvious retort is that we should let markets sort it out. At some level I really do wish we could do that but there is no working model anywhere of market based medicine having worked and controlled costs. There are examples of trying more market based approaches where costs have increased.
Steve
Those examples is why medicare is well beyond an “accounting” or “tax/revenue” problem.
Suppose there was a magical tax (even a wealth tax) that can raise the projected 10% deficit.
Is that extra money going to lead to an extra 10% nursing home beds with the extra 10% nursing home staff. The likely answer is no; but that’s what the demand side looks like, we need 10% more beds for the aging population — and that is what’s driving the accounting deficit.
The ideal way would be to increase the productive capacity of the health care system. Like having chatGPT robots augment the staff at nursing homes, etc.
The basic problem is the replacement of high profit, high wage, high tax revenue manufacturing with low profit, low wage, and low tax revenue services. The US economy does not create enough wealth, and services and finances merely redistribute what there is. You can make an argument that services and finances should be subtracted from GDP.
The situation is aggravated by less than replacement birth rates, a critical problem in every country outside sub-Saharan Africa. Japan’s population has been falling for several years. Very high immigration hides the fact that America’s native population has below replacement birth rates, too.
The result is an older, more dependent population, and fewer workers to take care of the elderly and generate goods and services
Furthermore, increasing the productivity of businesses that depend heavily on human work, like medicine and education, is virtually impossible, because the human workers cannot be replaced, except on the margin. What is chatGPT going to do, other than admissions paperwork? Set a bone? Do you think physicians and nurses are willing to take large pay cuts? Especially if there are fewer of them?
Social Security, Medicare, Medicaid, all the hundreds of other social welfare programs are a train wreck that cannot be avoided. Entitlements will not be cut. Most likely our military will have to be radically downsized. That is the choice Europe made.
PS. The corruption and incompetence that wokeism injects into our education system and the professions means that the skill level, even basic competence, of our professional class is decreasing towards Third World standards.
One thing I should add is that I feel very good about the quality of graduates I am seeing come out now. They are consistently better than they were 30-35 years ago when there was a lot more variability. I know we are supposed to complain about “the kids now” but I am encouraged.
Steve