It's Medicare, Stupid

Of the nation's two giant entitlement programs, only one is in real trouble. It's Medicare, not Social Security. As our special supplement makes clear, the Social Security system isn't in a crisis. The system has been in surplus for years now, and those surpluses have been used to cover part of the government's annual budget deficits. After 2018 and continuing through mid-century, the federal government must repay the system what it borrowed, the same way it pays back other bondholders, using revenues from other sources such as income and corporate taxes.

As labor secretary, I was a trustee of the Social Security system. In 1994, we anticipated that Social Security wouldn't be able to pay all of its obligations beyond 2029. But that projection was based on very conservative assumptions about economic growth. The current trustees, updating the assumptions, have pushed the year of reckoning outward to 2042, and the Congressional Budget Office (CBO) pushed it further, to 2052. Even this lowballs the effects of economic growth. If the economy grows anywhere close to its historic average of 3.2 percent a year -- the average since the Civil War! -- the system won't ever run out.

George W. Bush's “privatized” accounts are a classic bait and switch: Use a perceived problem in order to justify a “solution” that has nothing to do with it. Privatization would borrow some $2 trillion over the next decade, much of which would line the pockets of Wall Street financial firms. Eventually the system would make up the loss with steep reductions in future Social Security benefits, most likely by indexing the benefits to consumer prices instead of wages. According to the CBO, this change alone would cut a typical retiree's total benefits from the 42 percent of pre-retirement income they get today to 22 percent a few decades from now. Such a drop might be tolerable if the returns from private accounts made up the difference, but they wouldn't. The CBO estimate includes expected returns from private accounts! Rarely in history have so many people been offered so bad a deal in order to enrich so few.

Even if it otherwise made sense, a privatized Social Security system would leave seniors prey to bad luck, bad timing, or ill-advised investments. Remember that the purpose of Social Security is contained in its second word, “security.” And that security comes from spreading financial risks, hence the first word, “social.” Bush's plan for Social Security is neither social nor secure.

The real problem is Medicare, which is going bust at an alarming rate. And that's not mainly because of an aging population; it's because of willfully bad policy. Private insurers have every incentive to game the system through Medicare HMOs. Insurers are spending a fortune marketing and cherry-picking, seeking to avoid seniors likely to require expensive treatments. Of course, this is precisely the approach the White House hopes to expand with its proposal for private health accounts. The result would be to shift more costs and risks to individuals, thus making health insurance less reliable. Other nations with older populations and universal health systems spend less per capita on health overall, including less on the elderly, and yet have better health results.

The White House would rather not talk about any of this. Indeed, its new Medicare drug benefit makes the Medicare problem much worse. The GAO (an arm of Congress formerly known as the General Accounting Office) recently measured the projected costs of Social Security and Medicare over 75 years minus expected revenues. Four years ago, before Bush's drug benefit was enacted, the long-run costs of the two programs were roughly equal. Today, the cost of future Medicare promises is about twice that of Social Security.

The biggest reason why Bush's Medicare drug benefit is so expensive is that the legislation creating it explicitly prohibits the federal government from using its bargaining power as the world's largest buyer of drugs to negotiate lower prices from pharmaceutical companies. In other words, the law is a giant giveaway to the drug companies, guaranteeing them a huge new market at top-dollar prices.

So it's a double cover-up. The White House is trying to scare Americans about a Social Security “crisis” -- first, because it wants to privatize Social Security and give a big payoff to Wall Street, and second, because it wants to divert attention from the exorbitant costs of its Medicare payoff to Big Pharma. If Democrats are truly concerned about unfunded government liabilities decades from now, they should say no to Social Security “reform” and demand that federal government use its bargaining leverage to get lower drug prices for Medicare.

Robert B. Reich is co-founder of The American Prospect.

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