Social Insurance: The Real Crisis

This week and next, The American Prospect, in conjunction with The Democratic Strategist, is proud to sponsor a special forum titled: Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs.

This unique forum will proceed through seven essays—from Henry Aaron, Andrew Levison, Bob Kuttner, Bill Galston, Dean Baker, Mark Schmitt, and Will Marshall—with occasional summaries from the co-moderators, Kit Rachlis of the Prospect and Ed Kilgore of the Strategist.

The distinctive goal of this forum is to offer a “progressives-only” debate on entitlements—a debate that is often avoided or distorted by the necessity to resist conservative ideological assaults on the New Deal and Great Society safety net or by media-driven elite “deficit hawk” campaigns that seem to begin with the assumption that America’s only fiscal problem stems from “unaffordable” or “runaway” entitlements.

That in the mainstream media “entitlement reform” has become a synonym for structural changes in entitlements designed to cut benefits, shift costs to beneficiaries, or abandon national responsibility for these programs, has inhibited an important intra-progressive debate over how the safety net can be enhanced, sustained, and harmonized with other important progressive priorities.

Progressive discussions of this subject are also frequently hampered by the conflation of substantive arguments about social policy itself with those focused on more practical matters of political strategy. 

Now, we believe, is an ideal time to re-open and clarify the intra-progressive debate over the future of Social Security, Medicare, and Medicaid (and perhaps food stamps and the post-entitlement cash assistance program Temporary Assistance for Needy Families, which also form elements of the safety net). After all, declining federal budget deficits have taken a lot of the steam out of the “fiscal crisis” campaigns on the right and center-right. Moreover, the abandonment of any “grand bargain” budget negotiations for the foreseeable future (mainly due to conservative refusal to consider tax increases on the wealthy) has taken “entitlement reform” proposals—particularly those conditionally proposed by the Obama administration—off the table as well. And finally, the “wait and see” period we have entered with respect to implementation of the Affordable Care Act means we can now discuss long-term prospects for Medicare and Medicaid without assuming these programs are eternally defined by their present role in the “Obamacare” system.

We have asked a broad spectrum of progressive thinkers and writers to offer their thoughts on the future of entitlements. Some of these individuals are generally identified with a staunch defense of Social Security and Medicare as they are now, others fear entitlements violate intergenerational equity or threaten non-entitlement “investments.” What they all share, however, is a fundamental commitment to the preservation and strengthening of a robust social safety net as a central goal of progressive social policy. 

Aside from the light this forum may cast on the options facing progressives in maintaining a strong social safety net and the economic climate needed to sustain it, we also hope the forum will offer a model for an enhanced intra-progressive discourse. With the Obama administration soon to enter its final stage—and with progressives coming out of the defensive crouch conservative political tactics have induced—it is likely that we will soon witness one of those periodic “struggles for the soul” that occur when values, goals, policies, strategies and tactics are all under active discussion.

As we all know, such discussions have in the past occasionally taken on a bitter tone of recrimination and name-calling, and have also become associated with the agendas of individual politicians and organized factions. In keeping with the philosophy of the Prospect and the mission of the Strategist, we have sought to foster an atmosphere of civil and empirically-based debate in which no one is presumed to have a monopoly on the mantle of progressivism and no one attempts to score political points by decrying either excessive orthodoxy or incipient heresy rather than achieving persuasion by careful, reasoned argument.  

As a practical matter, after the initial essays in this forum have been presented, we will then entertain rejoinders and follow-ons from all participants—and if appropriate, from others. The forum will continue until all that’s worth saying has been said.  We hope you enjoy, and most of all, benefit from, this discussion of Progressive Perspectives on the Future of the New Deal/Great Society Entitlement Programs.

There is a severe and deepening crisis in American retirement and health care. But it is not the one that has dominated the public debate.

The supposed crisis that has gotten most of the attention is the rising cost of “entitlements,” specifically Medicare, Medicaid, and Social Security—defined purely as a budgetary issue. But the true crisis is that an increasing percentage of Americans lack financial security in retirement and pay far too large a share of their incomes for health care.  The Affordable Care Act addresses some of the health insecurity without fixing the deeper drivers of cost.

The two crises are related. The staggering inefficiency in the system by which we provide health coverage leads most Americans to pay too much for too little. Social Security is a highly efficient system, but the rest of the pension system delivers far too much to middlemen and far too little to the elderly.  In both cases, a more efficient and public system would produce more adequate benefits at less overall cost. The emphasis on the purely fiscal challenge produces demands for program cuts and diverts attention from the deeper failures of the system.

The Fiscal Reality and its Politics

Ever since the election of 1992, fiscal conservatives in both parties—and in third parties—have tried to make the federal deficit a central political and economic issue. In a series of articles and books beginning in 1982, the billionaire investor and conservative activist Peter G. Peterson began warning that Social Security was heading for a crisis of insolvency, which in turn would crash the economy. Peterson underwrote the Concord Coalition and later created the Peter G. Peterson Foundation to spread the budget alarms. In the 1992 election, the third party candidate, H. Ross Perot, made the federal debt the centerpiece of his campaign and briefly ran ahead of both major party candidates in the opinion polls.

But in the 1990s, both the debt crisis and the alleged Social Security crisis evaporated. Outlays continued to grow throughout the Clinton era, from $1.409 trillion in FY 1993 to $1.863 in FY 2001, but revenues grew even faster.

Supposedly, fiscal restraint gave the bond markets confidence in lower inflation, which in turn reduced interest rates and powered the recovery. In reality, the only connection between reduced deficits and cheaper money was in Fed Chairman Alan Greenspan’s mind. A lower deficit gave Greenspan the political cover to cut interest rates. This was a political bargain with the Fed, not a necessary fiscal one, but prosperity returned.

Full employment in the late 1990s also increased the receipts coming into the Social Security trust funds, which are financed by payroll taxes. Social Security’s supposed day of reckoning, when it would no longer be able to pay all of its benefits, receded by 13 years in just seven years. In 2001, the federal budget was projected to be in surplus indefinitely, leading the Fed to worry how it would conduct monetary policy in the absence of Treasury securities to buy and sell.

What caused deficits to resurge under President George W. Bush had nothing to do with the aging of the population or the rising costs of social insurance and everything to do with two wars, two rounds of tax cuts, and the most severe financial collapse since 1929. But the economic crisis gave the supposed Social Security crisis a new lease on life, and once again calls were heard to cut Social Security outlays in the name of deficit reduction.

These calls, unfortunately, even reached the Obama White House. After a year of emphasizing public investment via the Recovery Act, Obama’s economic team advised him, prematurely, to pivot to deficit reduction. This led directly to the late and little lamented Bowles-Simpson Commission and put the President squarely in the camp of believers in the Grand Bargain that Pete Peterson and Robert Rubin had been promoting for decades: Cut Social Security and Medicare, come up with token tax increases that even Republicans can support, and the reduced deficit will restore confidence in the economy.

Three things were disastrously wrong with this medicine.  It short-circuited the stimulus that the economy still needed (and needs). It put Obama on the side of austerity economics, which was ill advised as economics and bad as politics. And it undermined the clearest single issue differentiating Democrats from Republicans—the defense of Social Security and Medicare. When Obama’s advisers decided to claim more than a trillion dollars in unspecified savings in Medicare to fund much of the cost of the Affordable Care Act, the White House blurred those differences even further.

So the White House has repeatedly bungled the politics of defending America’s most valued social insurance programs. The Republican takeover of the House in the 2010 elections was one result. At this writing, Lake Research finds that 82 percent of all Americans oppose cuts to Social Security, including 83 percent of Democrats, 82 percent of Republicans, 78 percent of independents, and even 74 percent of self-described Tea Party members.

There are ways to shore up Social Security and reform medical care that don’t require taking income or services away from America’s elderly population. Before returning to those strategies, let’s take a closer look at how the elderly live.

The Retirement System

A generation ago, most large employers provided pensions as a fringe benefit of employment. The typical pension plan was a so-called “defined benefit” plan. Workers and employers paid into a fund. The retiree was guaranteed a fixed pension based on a formula based on years of service and earnings. The corporation administered the plan and bore the risk of adequately funding it. As recently as 1980, some 40 percent of American workers had such plans. Today just 7 percent do.

The economic slowdown of the 1970s squeezed corporate profits and led many employers to seek ways of shedding pension obligations. Large companies began substituting 401 (k) plans for true pensions. A 401 (k) is merely a tax-sheltered savings account. The risk of hitting a down stock market or outliving one’s resources is entirely on the worker and retiree.  In addition, many companies (and the private equity firms that bought and sold companies) used the technique of bankruptcy to loot worker pension funds by at least a trillion dollars. Corporations also played the game in the years of the booming stock market of extrapolating current annual returns, and pretending that their pension plans were overfunded—then when the crash came, they cried poor-mouth and cut them back.

The savings in 401 (k) plans are grossly inadequate to finance more than a few years of retirement. Work by Alicia Munnell, who the Retirement Research center at Boston University’s business school, reports that the typical worker on the verge of retirement (age 55-64) has just $42,000 in his or her 401-k. If you convert that sum into an annuity, which guarantees a monthly payment as long as you live, it produces about $2,000 a year. The average Social Security benefit is just over $14,000 a year. An income of $16,000 for retirees is not luxurious. The rate of labor force participation in the United States has dropped sharply since the financial collapse of 2008, but the one exception is people over age 65, because fewer and fewer of the elderly can afford to retire.

Pete Peterson contends that “a substantial part of these [Social Security] retirement payments go to people like me.” But Michael Hilzik of the Los Angeles Times has calculated that the $1.14 billion in Social Security payments that went to recipients earning $1 million or more in 2009 amounted to less than one-fifth of 1% of all benefits. If we want to recoup that money, the most direct way is via the progressive income tax, not by messing with Social Security.

Despite the shrill political claims of retirees living it up at the expense of the young, almost two-thirds of all seniors depend on Social Security for 70 percent of their income. Fully 46 percent of elderly widows and other unmarried seniors depend on Social Security for at least 90 percent of their income.  Social Security is financed by payroll taxes, which directly reflect wages. The real Social Security problem is a problem of inadequate worker earnings that have not kept up with productivity growth.  If wages during the last 30 years had tracked the average annual increase in productivity growth, as they did during the first 30 years after World War II, the average family income would be well over $80,000, far more payroll tax receipts would be pouring into the Social Security trust funds, and the system would be in surplus indefinitely.

Nor has the cap on Social Security earnings subject to payroll tax stayed at its traditional level of about 90 percent of all earnings. As income of the top few percent has soared, payroll taxes now cover only about 83 percent of earnings. Lift that cap and much of the fiscal problem is solved.  The projected 75-year deficit is around one percent of GDP, a shortfall that can be made up by modest tax increase on the well off. There is no good reason to cut benefits, much less to proclaim a crisis.

What the retirement system needs is a universal, portable pension, to make up for the collapsing private pension system and the minimal retirement income afforded by Social Security. Such a system would acknowledge the reality of today’s labor market, in which few people stay with an employer long enough to qualify for a traditional pension, and few companies even offer one. But until that day comes, Social Security is the core of retirement and needs to be defended.

For the generation that retired before the crash of 2008, inflated housing prices took some of the sting out of pension inadequacy. You could sell the family house, move to a smaller place and use the cash to subsidize retirement. But while housing values have begun to recover, it is unlikely that housing prices will soon inflate at the rate they did in the three decades between 1978 and 2008.

One class of worker who still has relatively decent pensions is public employees. But public pensions are at risk of succumbing to a contrived budget crisis of state and local government, in which government underfunds pensions and then claims that workers are getting too good a deal. Against these realities, the one entirely reliable part of our retirement system, Social Security, is more important than ever.  Its supposed fiscal crisis is manageable.

The Health Care System

Medicare is indeed increasing in cost far faster than the general rate of inflation. But Medicare costs are rising because Medicare is embedded on a grossly inefficient larger health care system (in fact, its own costs are inflating at a slightly slower rate than those of the system as a whole).

The Affordable Care Act promises to slow the rate of increase in health care inflation. But even with some heroic assumptions, the Obama Administration projects that health care will continue to consume at least 17 percent of GDP. The usual explanation is the aging population, new and costly medical technologies, a tax-favored insurance system that is overly generous in what it covers, and doctors practicing defensive medicine for fear of malpractice suits. Yet every one of these causal factors is secondary. The primary cause of medical inflation in the United States is a commercialized and fragmented system, in which major players pursue sources of profit rather than cost-effective universal care.

This fundamental reality has defied four decades of cost-containment efforts, beginning with President Nixon’s reinvention of prepaid group health plans as commercial HMOs, and a long list of largely failed payment reforms and efforts to create incentives for physicians to communicate better, to shorten hospital stays, to order fewer tests, and to shift to generic drugs. The reason is that the system’s major players – hospitals, drug companies, doctor specialty groups – all behave as profit-maximizers. (With rare exceptions, this is true whether a hospital is nominally non-profit or for-profit.)  This core reality has defied several decades of research demonstrating outrageous pricing practices by hospitals and indefensible variations in practice patterns. More refined cat-and-mouse efforts to constrain costs will continue to fail as long as the system remains a predominantly commercial one. Until the essential nature of health care changes, the infinite regress of cost-maximize and cost-contain will continue to evoke Mad Magazine’s “Spy Versus Spy.”

Other advanced nations have the same advances in medical technology and the same demographic pressure to reckon with (most have longer longevity than we do), yet they manage to cover the entire population for around 10 percent of GDP. Most advanced nations have better health outcomes, as well as a lower rate of medical inflation.

A universal, non-commercial system, by its very nature, delivers a lot more care for a lot less cost.  Universal systems tend to invest relatively more in public health and prevention, which is not a profit-center for a commercial system. They encourage all people to receive basic care, which saves huge sums down the line. They universalize standard protocols for such well-known conditions as diabetes and childhood asthma. They treat tests such as mammograms as public health screenings rather than commercial strategies.

As Medicare costs keep rising, Congress is in the habit of projecting future savings (such as reduced payments to physicians) that prove politically impossible to carry out.  The worst outcome of all would be the conversion of Medicare and/or Medicaid to a voucher, which would leave ordinary people with truly barebones coverage that failed to cover needed care, and allow affluent people to supplement insurance out of pocket. Medicare would “save” money, but the savings would be entirely spurious.

Until we get serious about a universal and social health and retirement system, the “solution” to the perceived budgetary crisis will be to chip away at the inadequate benefits of the system that we have. In the case of public Social Security, what we have is efficient but insufficient. In the case of health coverage, it is both inefficient and inadequate.

Generational Justice

 Much of the crusade to rein in costs of social insurance in the United States invokes our children and grandchildren. But the economic forces that are dimming the prospects of future generations include a slow recovery from a protracted economic slump, a lack of jobs that pay what used to be called a family wage, high costs of college, of homeownership, and of starting a family. Cutting Social Security and Medicare will do nothing to change these realities, and cutting the deficit could retard the recovery.

It’s not as if the groups clamoring for cuts in Social Security were proposing significant increases in spending on the young. There is a good case that we should be spending another two or three percent of GDP on outlays that would help the next generation, especially those who don’t have affluent parents to give them a private head start. Universal pre-kindergarten is urgently needed. Likewise, high-quality day care and after-school programs, both to help working parents and to enrich the cognitive and social development of children not from families that can purchase amenities privately. Community colleges are an important stepping-stone for the children of the non-rich, yet only 30 percent of students get their degree within seven years, because so many students are also working fulltime.

But although the sponsors of a grand bargain invariably invoke the well being of future generations, the proposed bargain would cut Social Security and Medicare for the sake of reducing projected deficits and increasing defense spending. The young are useful as symbols, but there is nothing in the grand bargain other than the vague and mistaken claim that reduced spending on social insurance for the elderly will somehow deliver a sounder economy of broader prosperity for the young.

America needs more, not less social income, for all ages. Instead of talking from the old, allegedly to give to the young, we need to restore adequate taxation on the affluent and build a more efficient system of health care and retirement, as well as social supports for young families. If these goals are currently outside what passes for mainstream politics, that doesn’t make them utopian. They are far more realistic as a remedy for what ails America than a grand bargain to cut the inadequate social insurance that we have.

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