How to Cut Entitlements
Commenters raised some good points in response to my last post, and I think the “it seems drastic and dangerous to just cut [entitlements] entirely” objection deserves a front page response. How entitlements are to be cut is a huge question, and there are major potential problems if it’s done wrong. I’d much prefer we had never established most entitlement programs in the first place, but we’re stuck with them because too many people are counting on the handouts we’ve promised them.
First, I should clarify what I meant by “cut”. The author of the article I linked observed that McCain’s tax proposals would “reduce” revenue from 19% of GDP in 2008 to 15% of GDP in 2018. “Reduce” is in scare quotes because if economic growth averages at least 2.4% over that 10 year period, actual revenues will go up. The author of that article rightly observes that government spending would need to be greatly reduced from planned 2018 levels in order to offset the reduction in anticipated revenue, and short of making a massive cut to the military and virtually eliminating non-defense discretionary spending, entitlements are the only place in the budge where there’s enough money to offset that much revenue.Tax cuts or no, entitlement spending is expected to grow well beyond our ability to pay for them over the coming decades. The problem is that the major entitlement programs (Social Security, Medicare, Medicaid, and SCHIP) are growing not only faster than inflation, but also faster than GDP growth. This is happening for two reasons:
- For Social Security and Medicare in particular, as baby boomers retire the number of beneficiaries is growing faster than the size of the general population.
- The costs per beneficiary are growing much faster than inflation.
For Social Security, there’s an easy and relatively painless fix that doesn’t involve screwing current retirees or people close to retirement whose plans count on Social Security being there. Social Security benefits for new retirees are indexed not to prices, but to wages. Index them to prices, so that someone who retires in 2018 gets a check with the same purchasing power as the check received by a 2008 retiree rather than 30-40% more, and the Social Security deficit goes away. I would also like to see a gradual increase in the retirement age, and eventually a gradual phase-out in favor of 401(k)-like personal retirement savings, but merely fixing the indexing formula would make a huge difference.
For the health care entitlement programs, the problem is harder. If health care costs continue to rise faster than inflation, then a real cut in the level of benefits would be necessary to bring the programs under control. You could do this with price fixing and waiting lists for non-emergency services, the way most other first-world countries do, but I have enough faith in the free market that I think that we’d better serve Medicare and Medicaid beneficiaries by giving new beneficiaries money to buy private insurance and indexing that money according to the rate of growth we can afford for those programs. Either plan will ration services, but my plan would let beneficiaries choose their tradeoffs with their buying decisions and indeed to plan ahead and save more for retirement to make up the difference out of pocket, rather than having their health care limited by government fiat.
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35 comments
For starters, I object to the phrase “handouts.” Most of us have paid considerable taxes and worked very hard for the safety net these programs provide, thank you very much.
Otherwise, I mostly agree with your suggestions, although I think taxpayers should always have the option of a government-run program if they are unhappy with what they get in the private market. Libertarians are completely wrong to suggest that private companies always offer better service. But yeah, for years I’ve said that people should be presented with a cafe plan where they can choose the system they want. Although the way they did it with the prescription drug benefit is more complex than needed, that’s for damned sure.
The ongoing problem with medical care is that it’s been too successful. Sure, there’s tons of waste and such, but even if you got rid of the waste and inefficiencies, there’d still be lots of expense and expenses always be rising for “cutting edge” treatments.
The problem is that conditions that would cheaply kill us 20 or 50 years ago can now be regarded as expensive chronic conditions. As we discover more treatments and such, health care will continue to get more expensive.
As Europeans already do, any state-run health care scheme would have the implicit contract that you’ll get “standard” health care, but society doesn’t owe you immortality at infinite cost. The interesting question is whether voters will be willing to allow those who can afford it buy immortality.
This is why I don’t like the idea of “health care as a human right”. If it’s a human right, it’s hard to argue for anything less than immortality if a treatment exists at any price. If it’s recognized as social charity, one can make a better argument for limiting it and allowing people who can to pay for things not covered by the standard coverage.
foobarista’s last blog post..The “pain threshold” of taxes…
Ahhh, foobarista, you’re looking at the Europeans charitably.
A less charitable view is that the governments are quietly offing the elderly as a cost control measure. The open Sandman wouldn’t be acceptable, but Grandma dying in a heat wave while the family is on the Riviera, that’s ok.
Dishman: But how is that any different from private insurance companies which now refuse to provide certain lifesaving treatments because they’re untested, experimental, unlikely to be of more than marginal use, etc.? This is one thing I’m increasingly impatient with economic libertarians about: the strange presumption that bureaucracy is okay, but only so long as it’s a private bureaucracy and not a government-run bureaucracy.
If my HMO refuses to pay for a treatment that may, or may not, add five years to my grandfather’s life, how is that better than if Medicare refuses same? I don’t see any difference at all.
I object to the phrase “handouts.”
Medicaid and SCHIP are handouts because by design they redistribute wealth — the rich and the upper middle class are taxed to buy health care for the poor and the lower middle class.
Social Security and Medicare, as you describe, were designed to work like a pension plan where you pay in and then you get a benefit later based on what you originally paid in. In practice, there’s a considerable redistributive effect because the benefit formula is broken. The are not pure handouts, but if they weren’t handouts at least in part, then we’d be able to let anyone opt out at any time without damaging the financial integrity of the system.
If my HMO refuses to pay for a treatment that may, or may not, add five years to my grandfather’s life, how is that better than if Medicare refuses same?
The difference is that your grandmother picked the HMO and accepted lower rates in exchange for a risk that down the road they’d refuse payment for something she needed. In the government program, our elected representatives made the choices for everyone.
The difference is you can do research in advance to know what your HMO will and won’t pay for. You can choose between different insurance providers based on how much you’re willing to pay, and what level of service you want. You may not have recognized your choice, but you did, in fact, choose the policies.
Furthermore, your insurance company only has an interest in medical costs. They are generally not paying for your retirement. Your insurance company is motivated to try to keep costs under premium, because the premium will continue to be paid. If you live, it’s not a guaranteed loss.
Once a person has retired, however, the government generally has no financial interest in keeping them alive. Except for investment income, a retiree is consuming government money without contributing to the treasury. Taxes on investment income would be the same regardless of who was holding the investments.
Sometimes, I’ve toyed with my “trivial health care plan”: you pay the first $10K every year. After this, the government pays - out of taxes - up to $100K/year. (The government payment would only go to licensed healthcare outfits, but otherwise all procedures would be covered) And beyond this, you pay again. The prices for treatments need to be clearly posted, and it’s up to you to arrange your treatments and such.
Doubtless, a market for “cashflow” insurance at the bottom and catastrophic insurance at the top, as well as charities for both, would develop.
foobarista’s last blog post..The “pain threshold” of taxes…
When to comes to offering choices, it sounds great, but you have to consider your stance on the factor of human stupidity first. There seem to be two schools of thought on this:
A) If people choose poorly, it’s their own fault. Why should the rest of us be stuck with mediocre programs just because some people are too stupid to avoid the really bad programs?
B) People choose poorly because they’re actively misinformed by predatory agencies, or don’t have time to figure out all the details. Better to let the government run the best program it can and provide it equally to everybody.
To me, neither school is completely correct. The first is cold, and ignores the range of potential reasons behind these poor choices. The second results in most people ending up with what is, for them, a substandard program.
So, some sort of compromise is probably in order. Perhaps a government agency who’s job is to vet health care providers, before they’re allowed to receive your government-issued insurance check, similar to how the FDA vets new drugs before they go on the market.
I no longer view redistribution of wealth as a “handout,” sorry. Wealthy individuals benefit disproportionately from the financial system set up and maintained by our government, and there is therefore nothing at all wrong with asking them to pay disproportionately more in taxes.
As for there being some deep difference between a government-run medical bureaucracy and a privately-run one: I am having to restrain myself from being sarcastic. The government responds to voters, and to investigations by political figures; private bureacracies are much less responsive to such concerns, and they have the ability to use publicity to hide their own mistakes and duplicity. Private entities also can and do change their policies with little or no notice, or obfuscate with confusing language, especially if government regulators are allowing them to act in a lassez-faire manner; if you’ve ever been ripped off by a private company, or gone through a fight with a private medical insurer, you know this to be true.
Thus you are making a distinction without a difference: you’re asserting that somehow, the fact that it’s a private plan makes it morally superior, but dead is dead. Kicked to the curb is kicked to the curb. It doesn’t get better because you can say, “well, but I CHOSE to be fucked over by Blue Cross when I signed up for their package!” Baloney. And if Blue Cross screws me over, where will you tell me to go for redress of my grievance anyway? The courts? Oh wait, that would be a GOVERNMENT AGENCY, wouldn’t it? So that would be evil, right?
Give me a break guys. I agree with the thinking that it’s best if we can fire our insurance company if we don’t like them, which is why any reform of our medical system should include a choice of programs. But the idea that private bureaucracy is in any way morally or practically better? No, that’s just stupid, and I think most people who’ve actually dealt with large corporations recognize that.
(And by the way, I actually think Blue Cross is a very good company on the whole, I used them as an example just because everybody knows them, not because they’re a particularly bad insurer. I wish I had Blue Cross insurance right now, actually. I’d definitely prefer it to, say, Medicaid.)
If the government-run option is truly voluntary, where it gets the same per-beneficiary subsidy as its private competitors and doesn’t get preferred regulatory treatment, then I have no problem with there being a government run option. The problem I have with government is coersion.
If I jump out of an airplane and my parachute doesn’t open, I’m equally dead no matter my reasons for jumping out. But it makes a huge moral difference whether I jumped or was pushed because in the former scenario I chose the risk and in the latter it was forced on me.
The US health care system is unsustainable. Total health care costs in US were 13.9% of GDP in 2001. In 2007 they were 16% of GDP. By 2016 they are projected to be 20% of GDP. This is simply not sustainable. Much of this cost is paid today by employers, but employers are not going to be able to afford to keep paying this.
Private insurance is not a solution. Private insurance companies will exclude coverage or cancel policies for people that are seriously ill or likely to be seriously ill. That is what an insurance companies job is. Identify risk and price coverage accordingly. If you know someone is seriously ill and will need $200,000 worth of treatment in the next year, then the premium has got to be $220,000. Only a stupid insurance company that would be going bankrupt would sell coverage for less. Private insurance does a very good job of covering health people, and it doesn’t really want to deal with the elderly or seriously ill people. This is why Medicare was created in the first place.
The only way to get insurance companies to cover seriously ill people is to put them into large pools with mostly healthy people. Then insurance companies can figure out the cost of covering the whole pool, and come up with a reasonable price for coverage.
Mikeca: I basically agree, which is why I’ve been saying for some time now that A) insurance coverage needs to be mandatory for everyone, with subsidies for those who can’t afford to pay for it, and B) we have to put everyone in America in the same insurance pool (or break it up by state, with every state one pool). Then just allow people to choose which plan they want, with something like Medicare being one of the options alongside Blue Cross and the other private insurers, and everyone offering the same basic “floor” coverage.
This is actually the most likely thing to be able to pass, too, because it doesn’t destroy the private insurers–who are already massively regulated anyway.
Dean,
If a company lies to you in establishing a contract, that’s called fraud, and you have legal recourse.
If a politician lies to you, that’s called politics, and you have no recourse.
You and I are both screwed on Social Security, for example. I’m pretty sure you’re with me in thinking it’s not going to be there for us. That makes it a lie. It would be fraud, except it’s done by the government, so there is no recourse.
Metainsurance (which would pay your increased premiums for a time if you get diagnosed with an expensive condition) or term health insurance (where you contract for a fixed premium for a period of several years) both make a lot of economic sense for the situation mikeca describes. I wonder why the market doesn’t offer them. Is there some regulatory barrier, or is there a problem with them that I’m not seeing?
For my medicare reform proposal, my answer would be to weigh the insurance voucher based on your health status, so part of the healthy-to-sick redistribution of the current system is preserved.
I should amend my skydiving analogy to acknowledge the effects of representative democracy. If I’m pushed because of the 20 passengers on the plane, 11 (or even 19) wanted everyone to jump, I’m still being coersed.
We’ll keep Social Security solvent the way we have all along—by muddling through. We’ll adjust the rates, the retirement age, the formula for calculating benefits, and we’ll probably borrow a little. The problems with Social Security are not insuperable.
Medicare is a different can of worms. The current rate of cost increase is just unsupportable. Even if we went to a single-payer system, cutting private insurance companies almost entirely out of the picture, the saving realized would be eaten up in just a handful of years by the increases in the other pieces of the health care pie.
Health care costs are sapping the strength of many companies and creating major problems for state and local governments. Cook County’s biggest fiscal problem is Cook County Hospital.
I’ve posted on this subject extensively. I see no solution to the problem other than an overhaul of how health care is supplied in this country. The market is already doing some of that but the work rules that govern health care delivery will need substantial reform and that’s a political fight that nobody wants to get into.
I think there’s a fundamentally unsustainable problem with health care, yes. mikeca and foobarista have both touched on it.
Medical technology is improving. The results, however, are not cheap.
The problem is that there is no reasonable limit on the price of “best available care”. There is no fundamental reason why health care will not grow to consume our GDP.
Historically, medical care has always been limited by what’s possible. The statement “all your money won’t another minute buy” used to be almost true. Now it’s not even close.
Medical care is now fundamentally scarce. We will have to restrict its availability somehow. What we’re arguing about now is how.
True enough, except you have to take trends into account as well; the fact is that just like all technology, medical technology grows cheaper and more powerful over time. Operations that cost hundreds of thousands of dollars 30 years ago are now routine and cost a few thousand or even a few hundred dollars today. So the real question has to involve what level is worth funding or what’s not.
This still leaves us deciding that there is, in fact, a price you can put on human life, and a value judgment that has to be taken. But we’re going to have that argument whether we have private insurers or public insurers making the choices–and unlike some of you guys, I am not at all convinced that a bureaucrat from a Fortune 500 company is going to be the best person to be making that decision as opposed to someone who has to answer to elected and appointed government officials.
Actually, I think I am taking cost reductions into consideration. I believe that all the factors get combined into the “total cost of health care”.
The only term I might not be considering properly is the impact of computerization, which holds some prospect that Gordon Moore will somehow miraculously save the day.
A real problem here in the private vs. public insurance debate is the idea that consumers are not being coerced by private industry.
Big employers offer some health coverage, but, not being stupid, they offer only limited selections with whichever company gave them the best package deal for their employees. Now, I can opt out of that coverage and pay for insurance on my own, but that’s over 10x the cost since I’ve elected not to be in the large pool.
I am, in effect, being coerced to use certain limited sets of heath care providers. Now, you can argue that I can change jobs, but that doesn’t solve the problem as any employer is going to have a limited set of medical suppliers just out of common sense and it really does benefit the employees for the employers to be negotiating with as large a carrot as possible.
I’ll admit that I haven’t looked in depth at the various candidates’ public health care plans, but it seems that the whole debate comes down to:
Build as large a pool as you can to spread the costs around.
vs.
I’m (healthy/wealthy/not like them/etc..) so I want out of the pool.
Makellan, that makes two political things we agree on. I don’t like mandatory employer-provided health insurance, either, because they make us too dependant on our employers (we’re already dependant on them for our salary) and because they limit our choices. I can exercise a degree of choice by refusing to work for any employer that doesn’t offer a health plan I like, but while that’s much less burdensome than moving to a different country, my choice is still much more restricted than if I were buying my own health insurance.
Employer provided health insurance is an artifact not just of risk pools, but also of the tax code. If you buy health insurance for yourself, you pay with after-tax dollars, but if your employer buys it for you they pay with pre-tax dollars. Pre-Reagan, when marginal tax rates were 70% or more, that was an enourmous factor, and it’s still a big factor today when income tax rates are “merely” 10-35% with a 12.4% payroll tax. I’m quite happy about McCain’s proposal to replace the tax deductable status of employer-provided health insurance with a universal standard deduction for health care.
Personally, I’m happy with one of the insurance options offered by my current employer (an HSA plan), but with my previous employer I opted out of health benefits and instead bought an individual policy for less than what my co-pay would have been for the employer-provided policy.
Oh, I didn’t say that I disliked mandatory employer-provided health insurance. I actually like the options given by my current employer as well.
My argument is that saying that you have more choice in the private sector vs. a public plan is misleading.
Your current employer is MUCH larger and can offer the health care provider a bigger pool (carrot) and therefore negotiate better rates. Pulling yourself out of the pool is rarely a good idea if the pool was very large. I believe your primary argument against public health care stems from your desire to be able to pull yourself out of the pool *if* you can find something better in the private sector.
I also believe that the goal of public health care is to go to the insurance companies with a pool so large that they will offer amazing rates and the number of people who want to opt out will be small.
The problem with the public offering, from the insurance company’s perspective, is that the people who want to opt out are exactly the most desirable.
This is a great thread. Maniakes’ name must get on the sidebar.
My argument is that sometimes, the ability to choose better terms and conditions is more important than the cost savings from being part of the bigger risk pool. The reason I withdrew from the risk pool at my previous employer is that they only offered full-service health insulation plans, and I prefer self-insuring routine expenses and only paying for insurance against major expense, so I bought a high deductable plan and saved myself the bother of subsidizing people who go to the doctor every time they get a cold.
My biggest concern with regards to Medicare privatization is the decision about what medical expenses are worth it. Self-insurance, where I and I alone decide, is the ideal, but it’s only practical if I have hundreds of thousands of dollars in assets that I’m willing to part with if I have major health problems. The next best option is for me to contract with an insurance company of my choosing to underwrite expenses that exceed my ability to pay out-of-pocket, with a mutually agreed proceedure for deteriming which expenses are valid. Employer provided health care provides even less choice, and government-run health care provides less choice still.
You’re conflating two issues — true risk pooling, which insurance companies take care of regardless of who pays (which is why you don’t need employer-provided car insurance or homeowners insurance); and pre-existing-condition pooling, where healthly people like me pay much more then what the insurance provider needs to break even on us in order to subsidize people who have expensive medical conditions which are known when they’re shopping for insurance. The latter is a real problem, and my preferred solution is metainsurance, which I mentioned earlier in the thread.
Another issue that should be considered in the debate of public vs. private health-care is personal liberty:
If I have a contract with a private company, I am free to negotiate rates based upon my lifestyle. (i.e., do I smoke? am I overweight? Do I skydive or SCUBA dive?)
In a “National” health-care system, the government (i.e., other people) can legitimately claim to have no wish to subsidize your high-risk activities… and therefore make them illegal, or remove you from the insurance rolls. (This is happening right now in England.)
Those of you that support nationalized health-care: would you be willing to support a constitutional amendment that states no one could *ever* be denied care or benefits because of lifestyle choices? (That that this is practical in the real world… I’m just curious about your moral stance.)
– DW
I would.
The reason is that I don’t believe that those who take on truly high-risk lifestyles are a large enough percentage of the population to drive up the premiums too much for the rest of us.
I do not support nationalized health care, but I would support that amendment only if it contained a clause permitting higher co-pays for people with high-risk lifestyles. One of many reasons why I oppose nationalized health care is that it makes it impossible for you to take health risks without affecting me as well. I want to maximize what choices you can make without breaking my arm or picking my pocket. Risk-based copays would mitigate that problem, and your proposed amendment would probably ban them unless specifically worded not to.
Really?
Skydiving is a high risk activity. However, the risks don’t often result in large medical bills.
The really expensive things aren’t the high-risk activities. They’re medium risk things that are engaged in by lots of people that tend not to kill outright.
How about Obesity? That’s a high risk activity. Do you want your diet mandated by the government?
Here’s another one - unprotected sex with a spouse. That one tends to result in a lot of medical expenses. How shall we regulate procreation? Eugenics, anyone?
Isn’t there some group with a mantra of “U.S. out of my uterus”? Do you really want the government to be intimately involved with your body?
That is not true. Medical care is scarce by artifice.
That is not true. Medical care is scarce by artifice.
Could you elaborate on that? I think I disagree with you, but I want to make sure I’m not disagreeing with something different than what you intended to say.
I’m reading “scarce” in the economic sense that the economy can’t produce all the medical care anyone could possibly want without incurring a cost (by which definition just about everything but air and sunshine are scarce, a fundamental principle of economics), not the colloquial sense that there’s an extreme shortage of it.
The number and location of hospitals is controlled by government. We graduate the same number of physicians as we did 20 years ago even though the population is substantially larger.
Pharmaceuticals are made more expensive by artificial scarcity. The list goes on almost indefinitely.
I’m glad I asked. It turns out that I do agree with you, after all.
Pharmaceuticals are made more expensive by artificial scarcity.
I believe you’re referring to Patents. That’s a constitutional mechanism for paying for the research costs.
That is not true. Medical care is scarce by artifice.
I think you completely missed my point. It’s not that the number of doctors is limited, it’s that each and every piece of available medicine option costs time, effort and resources.
Just because some specific elements are artificially scarce, however, does not mean the whole thing is not fundamentally scarce.
Yes, it does. There’s a difference between a relative benefit argument (with which I have some points of agreement) and a fundamental character argument.
It’s not merely that some specific elements are artificially scarce. Every single provider—hospitals, doctors, nurses, pharmaceutical companies and even insurance companies—have legal protections.
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