[saymaListserv] Social Security or Insecurity: The Hard Truth

[Janet Minshall]

Dear AFM and SAYMA Friends, I have been silent on 
these lists for awhile.  It isn't because I have 
nothing to say.  I have been writing articles on 
political economics, some of which you may see 
eventually. The attached is a particularly good 
essay I found by economist Paul Krugman appearing 
in The New York Review of Books dated March 10. 
Its long but well worth reading. The New York 
Review of Books is one of the treasures available 
relatively inexpensively in bookstores near you, 
and in most libraries for free.

There are many loud arguments and discussions 
these days on Social Security. (They are almost 
as prevalent as arguments and discussions on 
"Peak Oil").  Paul Krugman does a good job of 
separating fact from fiction and relevant facts 
from irrelevant facts regarding Social Security. 
The issues he is addressing are, perhaps, the 
greatest economic issues we will face over the 
next fifty years or so. These issues will affect 
us all personally.  They will affect us all 
politically.  They will affect us spiritually as 
Friends.  They will affect our national spirit as 
much as our social concerns.

As always, all discussion is welcome.  Janet Minshall


Review

America's Senior Moment

By Paul Krugman
George W. Bush
(click for larger image)

The Coming Generational Storm: What You Need to 
Know About America's Economic Future
by Laurence J. Kotlikoff and Scott Burns
MIT Press, 274 pp., $27.95; $16.95 (paper)

Chart

1.

Two Problems, Not One

America in 2030 will be "a country whose 
collective population is older than that in 
Florida today." It will be in "desperate trouble" 
because the expense of caring for all those old 
people will cause a fiscal crisis. The nation 
will be plagued by "political instability, 
unemployment, labor strikes, high and rising 
crime rates." That's the picture painted in The 
Coming Generational Storm by Laurence Kotlikoff 
and Scott Burns, a book that has helped to feed a 
rising tide of demographic alarm.

But is that picture right? Yes and no. America 
does have an aging population, and a responsible 
government would take preparatory action while 
the baby boomers are still in the labor force. 
America also has very serious long-run fiscal 
problems. But these issues aren't nearly as 
closely linked as much of the discussion would 
lead you to believe. The view of demography as 
destiny is only a half-truth, and in some ways 
it's as damaging as a lie.

In this essay I'll try to set the record 
straight. Unfortunately, I can't do that by 
following Kotlikoff and Burns closely. Kotlikoff 
is a fine economist, one of the world's leading 
experts on long-run fiscal issues. His book with 
Burns is full of valuable information and sharp 
insights. Yet in their effort to grab the lay 
reader's attention, Kotlikoff and Burns do little 
to alert readers to the distinction between two 
quite different issues-an aging population and 
rising spending on health care. And their failure 
to make that distinction grossly distorts their 
discussion.

The demographic problem is, of course, real. It 
is, however, of manageable size-exaggerating the 
problem by confounding it with the problem of 
medical costs just gets in the way of dealing 
with it. The problem posed by rising medical 
costs, on the other hand, would be there even if 
the population weren't aging-and misrepresenting 
the problem as one of demography gets in the way 
of confronting it.

I'll start here by looking at the demographic 
problem-the aging population-which mainly 
concerns Social Security, then at proposals for 
Social Security "reform"-the scare quotes are 
there because the scheme currently under 
discussion would undermine our social insurance 
system, not save it. At the end I'll talk briefly 
about the much bigger, more intractable issue of 
paying for the expanding quality and quantity of 
health care, and the current state of political 
debate.

2.

Social Security and the Demographic Challenge

Chapter 1 of Kotlikoff and Burns's book is called 
"From Strollers to Walkers"-a catchy way to 
describe the aging of the US population. It's 
followed with a chapter called "Truth Is Worse 
Than Fiction," centered on a chart familiar to 
everyone who has looked at this issue: long-run 
projections from the Congressional Budget Office 
showing the combined expense of Social Security, 
Medicare, and Medicaid rising from less than 8 
percent of GDP now to more than 20 percent by 
2075. It seems natural to assume that the grim 
cost projections follow directly from the aging 
of the population, and the book doesn't tell you 
that this assumption is wrong.

One way to describe the truth is to say that 
there is no program called 
Socialsecuritymedicareandmedicaid: these are 
separate programs with separate problems. Look at 
the accompanying chart which shows the same CBO 
projection that Kotlikoff and Burns present, but 
breaks it down by program. Yes, the total rises 
drastically-but Social Security, although it is 
the biggest of the programs now and the only one 
of the three programs whose costs are driven 
mainly by demography, accounts for only a small 
part of that rise. That tells us that demography 
is not the main driver of these long-run 
projections.

How big is the demographic challenge? Pundits who 
want to sound serious love to contrast Social 
Security as it was in 1950, when sixteen workers 
were paying in for every retiree drawing 
benefits, with Social Security as it will be once 
the baby boomers have retired, with only two 
workers per retiree. But most of the transition 
from sixteen to two happened a long time ago. 
Since the mid-1970s there have been about three 
workers per retiree -and Social Security has been 
running a surplus. The real issue is what happens 
when three goes to two. How big a problem is that?

The answer is, medium-sized. As you can see in 
the chart, the aging of the population will cause 
Social Security spending to rise from its current 
level of 4.2 percent of GDP to a little over 6 
percent by 2030, at which point it will 
stabilize. If demography were the only factor 
driving rising Medicare spending, it would rise 
in roughly the same proportion, from 2.7 to 
around 4 percent of GDP. So if demography were 
the whole story, we'd be looking at an eventual 
demography-driven rise in spending of between 3 
and 3.5 percent of GDP by 2030, and no further 
increase after that. That's not a trivial 
increase, but it's also not overwhelming; a tax 
increase big enough to cover that rise in 
spending would still leave overall taxation in 
the United States well below the average for 
other advanced countries.

Still, a responsible government would prepare for 
the aging of America. Textbook fiscal economics 
says that when a government knows that its 
expenses will rise in the future, it should start 
running a surplus now. At first, this surplus 
should be used to pay off debt, which reduces the 
government's future interest costs. If the 
government runs out of debt to pay off, it can 
start to invest in assets such as stocks and 
bonds, which will yield future income. That's 
exactly the path the Social Security system, 
though not the government as a whole, has been 
following.
------------------------------------------------------------------------

Social Security has its own budget, with its own 
dedicated revenue base. In 1983, following the 
recommendations of a commission headed by Alan 
Greenspan, Congress tried to prepare the program 
to deal with the baby boomers: it raised the 
payroll tax, so that Social Security would run a 
surplus, with the express intention of building 
up a trust fund to help pay benefits once the 
baby boomers had retired. At first, it seemed 
that this action, together with some changes in 
benefits, had done the job: "For the next 75 
years, the OASDI program is estimated to be in 
close actuarial balance," declared the Social 
Security trustees in their 1985 report.[1] Later, 
the trustees lowered their estimates; the 
public's impression of a looming Social Security 
crisis largely dates from the mid-1990s, when 
they were predicting exhaustion of the trust fund 
by 2029. But the trustees have lately become more 
optimistic again: they now say the trust fund 
will last until 2042. The Congressional Budget 
Office says 2052, and many economists now think 
that the original optimism was right after all: 
if the economy grows as fast over the next fifty 
years as it did over the past fifty years, Social 
Security will be sound for the foreseeable 
future. And if the economy doesn't grow that 
fast, by the way, the high rate of return on 
stocks needed to make privatization work can't 
possibly materialize, either.

At this point a loud chorus on the right insists 
that such estimates are irrelevant, because the 
Social Security trust fund is just a meaningless 
piece of bookkeeping: it's a claim by one part of 
the government on another part of the government. 
The real crisis will come much earlier than 2042, 
that chorus says, because payroll tax receipts 
will no longer cover the full cost of providing 
Social Security benefits as early as 2018.
------------------------------------------------------------------------

Let's take this argument a step at a time. There 
are two ways to look at Social Security: you can 
view it as a stand-alone program with its own 
funding, or you can view it as just part of the 
federal budget. These aren't mutually exclusive 
views. On one side, Social Security has always 
been run as an independent program, and the 
independence of its budget has considerable legal 
and political force. On the other side, Social 
Security is, of course, part of the federal 
government, and its benefits must ultimately be 
paid out of the government's revenue. Depending 
on the question, it's sometimes useful to focus 
either on Social Security's specific finances or 
on its role in overall budgeting. What one can't 
do, however, is switch views in mid-argument. If 
you want to discuss the budget of the Social 
Security system, the trust fund and the interest 
paid on that fund must be part of the picture. If 
you want to discuss Social Security's role in the 
overall federal budget, well, you have to talk 
about the federal budget as a whole; the fact 
that one particular tax brings in less revenue 
than one particular category of spending has no 
significance.

What the crisis-mongers do, however, is switch 
between views to suit their convenience. For 
example, in his magisterial survey of Social 
Security issues in The New York Times Magazine of 
January 16, Roger Lowenstein caught Michael 
Tanner of the Cato Institute red-handed. Mr. 
Tanner's estimate of a $26 trillion deficit for 
Social Security turned out to be the result of a 
calculation based on the principle of heads I 
win, tails you lose: when Social Security runs a 
surplus, Mr. Tanner doesn't count it, because the 
system is just part of the government, but when 
Social Security runs a deficit, he treats Social 
Security as an independent entity.

If all this seems metaphysical, let's put it this 
way: What will actually happen when payroll tax 
receipts no longer cover 100 percent of benefits? 
The answer, quite clearly, is nothing.

There are only two ways Social Security could be 
unable to pay full benefits in 2018. One would be 
if Congress voted specifically to repudiate the 
Social Security trust fund, that is, not to pay 
interest or principal on the trust fund's bonds, 
which would in effect be a decision not to honor 
debts to retirees. In 2018 the payments on the 
trust fund's bonds would be sufficient to cover 
Social Security benefits. Repudiation of those 
payments is pretty much inconceivable as a 
political matter; writing in the periodical The 
Economists' Voice, David Kaiser of the National 
War College suggests that such a repudiation 
might even violate the Constitution. In that 
sense, the trust fund is as real an obligation of 
the US government as bonds held by Japanese 
pension funds. The other way would be if the 
United States found itself in a general fiscal 
crisis, unable to honor any of its debt. Given 
the size of the current deficit and the prospect 
that the deficit will get much bigger over time, 
that could happen. But it won't happen because of 
Social Security, which is a much smaller factor 
in projected deficits than either tax cuts or 
rising Medicare spending.

The grain of truth in questions about the meaning 
of the trust fund is that the rest of the federal 
budget has not been run responsibly. The Social 
Security surplus should have been kept in a 
"lockbox." Although this term has come in for a 
lot of derision, it was a useful shorthand way of 
saying that the federal government as a whole 
should in an average year run budget surpluses at 
least equal to the surplus of the Social Security 
system. And this in turn was a shorthand way of 
saying that the federal government as a whole 
should do the responsible thing and try to prepay 
some of the costs of an aging population.

In the 2000 campaign both candidates pledged to 
honor the lockbox. President Bush clearly never 
had any intention of honoring that pledge; his 
first tax cut would have broken the lockbox all 
by itself, and his insistence on pushing through 
another major tax cut after launching the Iraq 
war made it clear that this wasn't a fluke. But 
that's not a Social Security problem. Viewed on 
its own terms, Social Security has been run 
responsibly and is a sustainable system.

And the policy implication of that observation is 
also clear: the problem isn't with Social 
Security, it's with the rest of the budget. 
Social Security has already taken the steps 
needed to cope with an aging population; at most, 
it needs some minor tinkering. The main thing we 
need to do to cope with the demographic challenge 
is for the rest of the federal government to do 
its part, by dealing with the huge deficit we 
already have in the general fund.

3.

What About Privatization?

Let's now turn to the sort-of plan ("sort-of" 
because the administration still hasn't provided 
key details) to partially privatize Social 
Security, diverting part of payroll taxes from 
their current uses, paying benefits and building 
up a trust fund, and placing them in private 
accounts instead.

The administration's rationale for privatization 
is that it is needed because Social Security is 
in crisis. As we've seen, that's a huge 
exaggeration, and many of the things President 
Bush says-such as his assertions that the system 
will be "flat broke, bust" when the trust fund 
runs out-are just plain false. Also, the 
administration pretends that the core of our 
failure to prepare for an aging population 
resides in the finances of Social Security; 
again, as we've seen, Social Security has 
actually done a lot to prepare for the baby 
boomers. Mr. Bush's own actions- above all, his 
insistence on cutting taxes while waging war-are 
largely responsible for the real problem, the 
huge deficit in the general fund.

But even if a drastic change in how Social 
Security operates isn't necessary, there's still 
the question of whether such a change is a good 
idea.

When they aren't warning that only privatization 
can save us from doom, privatizers often make 
their case with the argument that people can do 
better investing their own money than the deal 
they get from Social Security. Here's a classic 
example of the genre: during the 2000 campaign, 
then-candidate Bush urged his listeners to 
"consider this simple fact: even if a worker 
chose only the safest investment in the world, an 
inflation-adjusted US government bond, he or she 
would receive twice the rate of return of Social 
Security." Vice President Cheney made a similar 
comparison, although he spoke about investing in 
stocks rather than bonds, just a few weeks ago.

As I pointed out at the time Mr. Bush made his remarks:

That's an amazing fact; it's even more amazing 
when you realize that the Social Security system 
invests all its money in, you guessed it, US 
government bonds. But the explanation-which Mr. 
Bush's advisers understand very well, even if 
[Bush himself] does not-is that today's workers 
are not only paying for their own retirement, but 
are also supporting today's retirees.

Or to put it a different way, you could equally 
well say that my family would have more cash on 
hand if we took all my mother-in-law's money and 
let her starve. Somebody must pay the cost of 
caring for retirees and older workers, whose own 
payroll taxes went to support a previous 
generation. If the payroll taxes of younger 
workers are no longer available for that purpose 
because they are being placed in private 
accounts, some other source of money must be 
found. This problem is often summarized with the 
deceptively innocuous term "transition costs," 
but it's an enormous one.



Kotlikoff and Burns offer a privatization plan 
that doesn't try to fudge the issue of transition 
costs. They call for a 12 percent national sales 
tax to pay benefits to current retirees and older 
workers. This tax would gradually be reduced as 
the beneficiaries of the current system died off, 
but it would remain high for a long time. That 
should give you an idea of what a responsible 
privatization scheme would entail.

I'd argue that even if we had some way to pay the 
transition costs, it would be a mistake to 
privatize Social Security: it was always intended 
to be an insurance program, not a 401(k), and we 
need that insurance more than ever in the face of 
growing economic insecurity. In any case, 
however, Mr. Bush isn't about to propose a tax 
increase on that scale or any other.

Instead, he proposes covering the costs of paying 
benefits to older Americans by borrowing the 
money. Private accounts would be created using 
payroll taxes that are currently used to pay for 
benefits; the government would therefore have to 
borrow to make up for lost revenue. The 
government would offset this loss of revenue in 
the long run by gradually reducing benefits 
relative to those under current law. These future 
benefit cuts supposedly wouldn't hurt workers, 
however, because they would be more than offset 
by the growth in their personal accounts.

Such schemes come wrapped in fine phrases about 
the "ownership society," but stripped down to 
their essence they are equivalent to an 
investment adviser telling you that you won't 
have enough money when you retire, but that you 
should make up for this shortfall not by saving 
more but by borrowing a lot of money, investing 
it, and trusting in capital gains.

Even if this strategy were successful, the payoff 
would be a long time coming. A Congressional 
Budget Office analysis of "plan 2" from Mr. 
Bush's social security commission, which is 
widely believed to be what Mr. Bush will 
eventually propose, found that it would increase 
the budget deficit every year until 2050. A 
similar analysis in last year's Economic Report 
of the President concluded that the debt incurred 
to establish private accounts, which would peak 
at almost 24 percent of GDP, wouldn't be paid off 
until 2060.

It's likely that financial markets would be made 
very nervous by borrowing on that scale, with the 
prospect of repayment so far in the future. Bear 
in mind that the debt incurred during the four 
decades of increased deficits would be a real, 
legally binding promise to repay, while the claim 
that privatization would save money in the long 
run depends on the assumption that whoever is 
running America half a century from now will 
follow through on benefit cuts, even if private 
accounts have performed poorly and left many 
retirees in poverty. In the real world, the bond 
market would consider the solid fact of soaring 
debt a lot more significant than projections of 
savings through politically determined benefit 
cuts many decades in the future. In practice, 
privatization would significantly increase the 
risk that international investors will stop 
lending to the United States, provoking a fiscal 
crisis, sometime in the not too distant future.

Even if we ignore the danger of provoking a 
fiscal crisis, the claim that borrowing to create 
private accounts will somehow benefit everyone is 
a remarkable exercise in free-lunch thinking. If 
nobody suffers any pain, where does the gain come 
from? If private accounts were invested in 
government bonds, as Mr. Bush suggested back in 
2000, there would be no possible gain; the 
interest earned by private accounts would be 
completely offset by the interest paid on the 
government borrowing to fund these accounts. So 
the claim that there will be gains from 
privatization always comes down to this: part of 
the private accounts will be invested in stocks, 
and privatizers insist that stocks are more or 
less guaranteed to yield a much higher rate of 
return than the government bonds issued to pay 
for the creation of those accounts.

As Michael Kinsley of the Los Angeles Times has 
pointed out, there's something very peculiar 
about that assertion: if stocks are a clearly 
better investment than government bonds, why 
would anyone out there be willing to sell all the 
stocks that would end up in private accounts, and 
buy all the bonds the government would have to 
issue along the way? Are politicians pushing for 
privatization asserting that they know more about 
future rates of return than investors making 
decisions about where to put their own money?
------------------------------------------------------------------------

In response to such questions, privatizers duck 
the conceptual issue, and take refuge in history: 
stocks have, in fact, been a much better 
investment than bonds in recent decades. But as 
the mutual fund ads say, "Past performance is no 
guarantee of future results." Stocks are much 
more expensive relative to underlying profits 
than they were in the past, which means that they 
can be expected to yield a lower return. The best 
bet, suggested both by a look at the numbers and 
by basic economic theory, is that prospective 
returns in the form of dividends and capital 
gains on stocks are somewhat higher than those on 
bonds, but not much higher-and that the higher 
expected return on stocks is offset by higher 
risk. That's why prudent investors hold 
portfolios containing both stocks and bonds, and 
why borrowing to buy stocks-which is, to repeat, 
what Bush-style privatization boils down to-is a 
very bad idea.

Taking away the assumption that stocks will yield 
very high rates of return fatally undermines the 
arithmetic of privatization. Again, consider the 
analogy of borrowing and using the money to buy 
stocks: if those stocks end up yielding a lower 
rate of return than the interest rate on the 
loan, you've made yourself worse off. Even if 
your best guess is that the return on stocks will 
somewhat exceed the interest rate, you can't be 
sure of that, and you'll be in a lot of trouble 
if your guess proves wrong. Most privatizers 
assume, when selling their schemes, that stocks 
will yield about 7 percent a year on average 
after inflation, while the interest rate after 
inflation will be only 3 percent. If the equity 
premium -the spread between the average return on 
stocks and the average return on bonds-really 
were that large, borrowing to buy stocks wouldn't 
be a sure thing, but the odds would be strongly 
in favor of coming out ahead. But if the expected 
rate of return on stocks is only 5 percent or 
less, which many economists think is more 
reasonable, the chances that borrowing to buy 
stock will end up being a los-ing proposition are 
quite high-especially if one takes mutual fund 
fees into account.

Privatizers hate it when you talk about 
fees-about the fact, for example, that the 
much-touted Chilean system has administrative 
costs about twenty times those of Social 
Security, or that according to Britain's Pensions 
Commission, "providers' charges" in that 
country's privatized system reduce the size of 
retirement nest eggs by between 20 and 30 
percent. But when we're talking about the narrow 
equity premium produced by realistic expectations 
of future yields, fees become a central issue.

The plan of Kotlikoff and Burns for personal 
accounts is useful as an example of what would be 
necessary to keep fees minimal: it calls for a 
system in which workers have no control at all 
over how their personal accounts are invested. 
Instead, all accounts would be placed in a global 
index fund administered by the government: "a 
single computer, situated in the Social Security 
Administration, would be programmed to buy and 
sell securities." In essence, the government, not 
individuals, would be doing the investing, and 
the personal accounts would simply be an 
accounting device. The administrative costs of 
running this system would be very low.
------------------------------------------------------------------------

But it's very unlikely, if Social Security is 
privatized, that the system will look like that. 
For one thing, the advertising for privatization 
stresses "choice." In fact, in 2002 the Cato 
Institute quietly renamed its Project on Social 
Security Privatization the Project on Social 
Security Choice (focus groups said that 
"privatization" had negative connotations). It's 
hard to see how to reconcile that advertising 
with a system in which a computer programmed by 
bureaucrats does all the choosing. Also, as a 
matter of political reality, the investment 
management industry isn't going to accept the 
idea that a huge pool of money and potential 
profits is off-limits. Investment companies gave 
lavishly to the inaugural celebrations, and are 
major contributors to the lobbying organizations 
that have been set up to push privatization. They 
aren't spending that money simply because they 
think privatization is in the public interest.

Suppose that we end up with a system like that of 
Britain or Chile, in which mutual funds compete 
to attract private accounts. In that case, 
there's every reason to believe that fees will 
take a large bite. In 2003, the average "expense 
ratio" on US stock funds- the ratio of all the 
various fees charged by management to the amount 
invested -was 1.5 percent. In Britain, providers' 
charges used to take more than 2 percent off the 
return of the average retirement account; new 
regulations have reduced that, but only to about 
1.1 percent. Put fees of that magnitude plus a 
realistic rate of return on stocks into a typical 
numerical model of privatization, like the one in 
the CBO report on plan 2, and privatization 
quickly turns into a sure-fire losing 
proposition: the government borrows to establish 
private accounts that if anything yield an 
expected rate of return lower than the rate the 
government pays on its bonds; yet those accounts 
introduce a major new element of risk.

If Bush-style privatization actually goes 
through, the end game is fairly predictable: it's 
what is happening in Britain now. A couple of 
decades from now, it will be obvious to everyone 
that the returns on private accounts have fallen 
far short of expectations, and that America is 
about to experience a resurgence of poverty among 
the elderly. There will be irresistible demands 
for the government to call off cuts in benefit 
levels. (Remember, the over-sixty-five population 
will be an even larger share of the electorate 
than it is now.) And the result will be to make 
the fiscal outlook much worse than it would have 
been without privatization: the government will 
have borrowed trillions of dollars with the 
promise of future budget savings, but those 
savings will never materialize.

4.

Medicare, Medicaid, and the Health Care Challenge

If demography is only a medium-sized problem, why 
do long-run federal budget projections look so 
scary? The answer is that they assume that the 
long-term historical tendency of health care 
spending to rise faster than gross domestic 
product will continue. That trend has not 
reflected runaway government spending: private 
spending on health care has risen almost as fast 
as government spending. (In 1980, private health 
spending was 5 percent of GDP, and government 
health spending was 3.8 percent. By 2003 the 
numbers were 8.3 and 7.0, respectively.) Nor is 
it a case of runaway inflation: rising medical 
costs have not historically been driven by rising 
prices for existing medical procedures. There is 
plenty of gouging and waste in the US health care 
system, but there always has been, so that's not 
a big factor in the trend. The main reason health 
care is continuing to absorb a larger share of 
the economy is innovation: that the range of 
things that medicine can do keeps increasing.

A good example of what drives rising health care 
spending is the recent decision by Medicare to 
pay for implanted cardiac devices in many 
patients with heart trouble, now that research 
has shown them to be highly effective. Should 
this be considered a cost increase? Only if we're 
careful about what we mean by "cost." It doesn't 
increase the cost of providing the same care as 
before; Medicare is spending more to take 
advantage of a new opportunity to save lives.

Because rising health care spending is, for the 
most part, driven by increased opportunities, 
it's not clear that a rising share of health care 
spending in the economy should be considered a 
bad thing. Here's what the Congressional Budget 
Office, the source of those frightening long-term 
projections, had to say:

Although the rise in health care costs is a 
serious concern for many policymakers, it largely 
reflects private choices.... As income rises, 
consumers may prefer to allocate a larger share 
of their resources to health care and a smaller 
share to other goods and services.[2]

Still, there is a problem-but it is social and 
moral as much as economic: How much inequality in 
the human condition are we prepared to accept? In 
Charles Dickens's Britain there were huge class 
differences in health and longevity, because only 
the well-off had access to adequate nutrition 
and, if living in urban areas, to a more or less 
sanitary environment. Today those differences 
still exist but are much narrower, in part 
because of economic growth (which means that more 
people can afford an adequate diet), but also in 
large part because of public spending on 
sanitation, disease control, and health insurance 
systems that try, however, imperfectly, to 
provide essential care to everyone.
------------------------------------------------------------------------

But what do we do as medical advances make it 
possible to extend lives or greatly improve their 
quality, but only at a very high cost? Today we 
expect the public sector to pay for essential 
care when individuals cannot pay, and we do so 
for good reason. Imagine the inequalities that 
would already exist in America if Medicare wasn't 
there: high-income Americans would receive hip 
replacements and bypass surgery in their old age, 
while low-income Americans would find themselves 
crippled or dead. Yet the cost of preventing 
fundamental inequalities in medical care will 
grow over time.

This isn't just, or even primarily, a question of 
whether we are prepared to raise federal taxes to 
pay for rising Medicare and Medicaid spending. 
The clear and present dangers, health econ- 
omists tell me, are the inability of state 
governments to pay their share of Medicaid, and 
the threat to private health insurance, which is 
gradually unraveling in the face of rising costs. 
Between 2001 and 2004, according to the Kaiser 
Family Foundation, the percentage of American 
workers receiving health insurance through their 
employers fell from 65 to 61, and this decline 
will continue unless the government starts 
helping out. (John Kerry's plan to have the 
government pay catastrophic health costs was an 
example of the sort of thing that may be 
required, but even that would have provided only 
limited relief.)

The problem of rising medical costs is much 
harder to resolve than that of an aging 
population. In the long run, in fact, it may be 
impossible to resolve. But there are things we 
could do to postpone the day of reckoning. One 
would be to prepay some of those future medical 
costs; at the very least, we ought to be building 
up a Medicare trust fund to deal with the 
demographic component of rising costs, i.e., the 
increase resulting from the rising proportion of 
people over sixty-five.

Another would be to find ways to make the US 
health care system more efficient. For the most 
part, that's a subject for another essay, but it 
seems worth making one point: when it comes to 
health care, the free-market ideology that 
currently dominates American political discourse 
seems utterly wrong. Systems that provide 
universal coverage, like those of France or 
Canada, are much cheaper to run than our 
market-based system, yet they yield better 
results with respect to life expectancy and 
infant mortality. Or if you don't trust foreign 
examples, consider the remarkable renaissance of 
the Veterans' Administration hospital system, 
described in an important article by Phillip 
Longman in the February Washington Monthly: he 
shows that the VA system's centralization of 
information and control over resources allow it 
to provide better care at lower costs than any 
private system.[3]

In other words, whatever the current 
administration and congressional majority propose 
to deal with the health care crisis-you can be 
sure they'll declare a crisis as soon as they're 
done with Social Security- will actually move our 
system in the wrong direction.

5.

Back to the Future

Unless something very unexpected happens, 
Kotlikoff and Burns's vision of an America that 
in 2030 has an older population than Florida 
today will come to pass. It's also quite possible 
that the state of the nation will be as bad as 
they suggest in their opening account. But one 
won't be the result of the other, and in a 
perverse way exaggerating the demographic 
challenge makes that grim future more likely.

Here's how the debate is really playing out, in four easy steps:

1. Talking heads and other opinion leaders 
perceive the issue of an aging population not as 
it is-a middle-sized problem that can be dealt 
with through ordinary changes in taxing and 
spending-but as an immense problem that requires 
changing everything. This perception is, alas, 
fueled by books like The Coming Generational 
Storm, which blur the distinction between the 
costs imposed by an aging population and the 
expense of paying for medical advances.

2. Because the demographic problem is perceived 
as being much bigger than it really is, the 
spotlight is off the gross irresponsibility of 
current fiscal policy. As you may have noticed, 
right now everyone is talking about Social 
Security, and nobody is talking about the 
stunning shift from budget surplus to budget 
deficit since Bush took office.

3. The focus on Social Security- the one part of 
the federal budget that is actually being run 
responsibly-is, in practice, offering the 
architects of our budget deficit an opportunity 
to do even more damage.

4. Finally, we're not having a serious national 
discussion about the bigger problem of paying for 
health care, and we probably can't in today's 
ideological climate.

Four years ago, I and many other economists urged 
policymakers to think about the future cost of 
Social Security benefits, not because we thought 
there was anything wrong with Social Security 
itself, but because we regarded the future costs 
as a compelling reason not to cut taxes even if 
the overall budget was in surplus. Today, with 
the overall budget deep in deficit, and the 
administration considering "tax reform" that will 
amount to even more tax cuts for the well-to-do, 
it all seems a moot point. The first priority is 
to do something about the fiscal crisis we have 
right now, not worry about the fiscal crisis we 
might face a generation from now.

-February 10, 2005

Notes

[1] See www.ssa.gov/history/reports/trust/ trustyears.html, pp. 2-3.

[2] See www.cbo.gov/showdoc.cfm?index= 4916&sequence=2.

[3] Phillip Longman, "The Best Care Ever," Washington Monthly, February 2005.




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