If policy makers are truly interested in fixing the Entitlement Crisis™, they need to look at the factors that are pushing the federal budget along an unsustainable path. As we've noted before, Social Security has minor financing issues, but its full-benefit operation does not pose a threat to long-term fiscal fitness. Medicare, however, does. And while it is tempting to indict the aging of the Baby Boom generation for fueling rapid increases in health care costs, policy makers would be wrong to set out to simply reduce benefits and/or increase Medicare premiums as a fix. Instead, they should focus their efforts on the supply side of health care, rather than increased demand resulting from the aging of the population.

Health Care -- Bipartisan Support for Blocking Bush Medicaid Rule: CQ reports ($) that a House bill that would block the president's Medicaid rule changes is gaining support among Republicans. The proposed rule changes would shift about $17.8 billion (over five years) in Medicaid costs to states. The bill, H.R. 5613, will be marked up today in the Committee on Energy and Commerce Health Subcommittee.

War Spending -- Iraq Supplemental May Have Additional Stimulus Spending: After last week's deterioration of employment data released by the government, Sen. Majority Leader Harry Reid (D-NV) and Sen. Debbie Stabenow (D-MI), along with Democratic House leaders, are calling for adding extension of unemployment benefits to the upcoming Iraq war spending bill. House Republicans have vowed to oppose additional stimulus spending. CongressDaily ($)

Inequality -- CBPP/EPI: Income Inequality Continues to Rise: The Center on Budget and Policy Priorities and the Economic Policy Institute have released a lengthy report analyzing state-by-state data on income trends. The report concludes that "The gap between the richest and poorest families...grew significantly in most states over the past two decades...In fact, the nation's longstanding trend of growing inequality accelerated since the late 1990s as incomes fell for poor families in a number of states." CBPP/EPI Report Executive Summary

Taxes -- "Extenders" Package Could Move Before End of May: Sen. Finance Committee Chairman Max Baucus (D-MT) hopes to introduce, mark up and bring the extenders package of tax cuts to the Senate floor before the start of the Memorial Day Recess in May. The legislation would be fully offset, cover two years (2008 and 2009), and cost about $50 billion. Baucus would not pin down a date for introducing the measure, but stressed the need to get work done early: "We've got to do as much as we can during this work period." BNA ($)

The Washington Post wrote their lead editorial yesterday on the future of entitlement programs. The editorial once again lumps Social Security, a relatively healthy program, with Medicare and Medicaid, which face more serious funding issues not because they are entitlement programs, but because of the rapidly growing cost of health care in both the public and private sectors.

We have written a good deal on why Social Security should be kept separate from Medicare and Medicaid when discussing long-term fiscal issues and that the Social Security situation is actually not that bad and certainly not even close to a "crisis." (See here, here and here. Also, see our coverage of Congressional Budget Office Director Peter Orszag making the same point to Congress ).

Yet the Washington Post still does not understand the differences between two different causes they cite in the editorial (retirement of baby boomers, rising health care costs) and effects those causes will have. The main problem that must be addressed has always been and continues to be health care costs, not the retirement of the baby boomers. In fact, just last week, the Center on Budget and Policy Priorities released an excellent report that showed the repeal of the Bush tax cuts for just the top one percent of Americans would generate enough revenue to close the entire funding shortage for Social Security.

While the main point of the editorial is well made (that politicians need to be forced to deal with these problems), the Post continues to follow other news outlets, policy makers, and even some budget experts in lumping the three programs together. This does not help move us toward a solution to the problems we face to keep the promises that have been made. We have to develop a clear understand of what we are up against before we attempt to fix it.

A Center on Budget and Policy Priorities report shows that a repeal of the Bush tax cuts for the top 1% of income earners would provide sufficient revenues to close the Social Security funding gap.

This striking fact should serve as a much-needed "reality check" in discussions over entitlement programs and the nation's long-term fiscal future. Too often, such discussions assume that Social Security faces a titanic shortfall that will require radical restructuring of the program, while paying little or no attention to the enormous fiscal damage that would result from extending the tax cuts without paying for them.

Indeed. Radical reform of the Bush Tax Cut system is desperately needed, and only a bipartisan approach to solving this issue will work. Congress must get serious about this issue convene, as soon as humanly possible, a commission to look at this program and recommend legislation to fix it.

The Medicare Trustees Report, released on Tuesday, paints a somewhat bleaker picture than the Social Security Trustees Report. Unlike Social Security which is projected to have a nontrivial cash flow problem in 2042, the Medicare report indicates that Medicare has two problems: 1) The exhaustion of the Medicare Part A trust fund and 2) explosive cost growth that presents a larger, longer-term problem for federal fiscal policy.

HI Trust Fund Exhaustion
The Hospital Insurance (HI) trust fund, which funds "hospital, home health, skilled nursing facility, and hospice care for the aged and disabled," receives revenues from payroll taxes. Currently, the rate of growth of HI expenditures (7.4 percent per year) is outpacing the rate of growth of HI's dedicated revenue stream (4.5 percent per year), and as a result, the trust fund will be tapped in the next few years and is projected to be exhausted in 2017.

The upshot of this revenue shortfall is that in 2019, revenues will be sufficient to cover only 78 percent of Medicare Part A's costs. In 2050, that coverage level falls to 40 percent, and by 2082, costs are projected be over three times the level of revenues.

Precipitous Cost Growth
The second issue of Medicare financing is the rapid growth in the cost the entire Medicare program, which includes Parts A, B (coverage of physician, outpatient hospital, home health, and other services), and D (prescription drug coverage). Medicare cost increases have historically kept pace with overall health care inflation - about 4.2 percentage points higher than inflation for all other goods and services.

At this rate of growth, Medicare expenditures are expected to be 10.8 percent of GDP in 2082. This is a substantial increase from current expenditures, which totaled 3.2 percent of GDP in 2007. And because of structure of the funding mechanism for Parts B and D - transfers from general revenues (the federal budget) and subscriber-paid premiums -, revenue growth for these parts will keep pace with expenditures. Economists predict that this explosion of revenue demands on the federal government may result in unsustainable national debt increases.

In a statement by Treasury Secretary Henry Paulson on the 2008 Social Security and Medicare Trust Fund Reports, the Secretary reaches deep to find big bad numbers to support his and the president's call for reform of the Social Security program.

Social Security's unfunded obligation--the difference between the present values of Social Security inflows and outflows less the existing Trust Fund--equals $4.3 trillion over the next 75 years and $13.6 trillion on a permanent basis. To make the system whole on a permanent basis, the combined payroll tax rate would have to be raised immediately by 26 percent (from 12.4 percent to about 15.6 percent), or benefits reduced immediately by 20 percent.

The "permanent basis" to which Paulson is referring is an infinite time horizon. That's right, the report says that a 3.2 percentage point increase in Social Security taxes is required to bring the program into actuarial balance forever. But, the report also says that to bring the program into balance over the next 75 years would require a 1.7 percentage point payroll tax increase - that's about half the increase the Paulson quotes and not quite as scary.

I also want to point out Paulson's citation that to bring the program into actuarial balance on an infinite time horizon would require cutting Social Security benefits today and forever by 20 percent. Immediately cutting benefits by 20 percent to avoid a chance of insolvency would be really stupid, because, as the report points out, when the trust fund is exhausted in 2041 - the date of insolvency - tax revenues will be sufficient to cover 78 percent of promised benefits. Got that? In 2041, we can cut benefits by 22 percent and maintain solvency forever.

In fact, it's getting better. The Social Security Trustees Report for 2008 was released by the Social Security Administration today (it's quite the page-turner). Here are the key facts:

• Social Security's "insolvency" date remains the same as last year - 2041. This is the year in which the program's payments will exceed its income.
• The year in which program's payments will exceed tax revenues remains unchanged - 2017. This is the year that the trust fund will first be used to make payments to beneficiaries
• The actuarial deficit over a 75-year horizon is 1.70 percent of taxable payroll - a 0.26 percentage point reduction from last year. This number represents the combination of increased revenues and decreased benefits as expressed by percent of taxable payroll that is required to avoid insolvency

Also included in the report is the cost of the program over the next 75 years. And as much as certain pundits (I'm looking at you Bob Samuelson!) would like you to believe that Social Security is a large bit of the long term fiscal challenge, the report underscores how small a portion of the Entitlement Crisis^TM Social Security is.

Expressed in relation to the projected gross domestic product (GDP), OASDI cost is estimated to rise from the current level of 4.3 percent of GDP, to 6.0 percent in 2030, and then to decline to 5.8 percent in 2082.

At its peak in 2030, Social Security will cost 1.7 percent of GDP more than it does today - keep in mind, too, that in 2030, Social Security is still solvent. That's not pocket change, but it's not the soul-crushing, economy-killing, puppy-eating monster that Entitlement Crisis^TM Henny Pennys make it out to be. To put into perspective, if President Bush's FY 2008 war supplemental request is fulfilled, that $196 billion would represent about 1.4 percent of current GDP. And while the war is an expensive project, it's hardly bringing the economy to a halt.

The real challenge in the long-term fiscal challenge is still health care costs. Data from GAO's Long Term Fiscal Outlook indicate that Social Security's modest cost increase (4.2 percent of GDP today to 5.3 percent in 2082) is a pittance compared to the growth in Medicare and Medicaid expenditures, which increase from 3.9 percent of GDP today to 13.9 percent in 2082.

The House and Senate successfully passed their versions of the FY 2009 budget resolution yesterday. The House passed their spending outline on a mostly party-line vote 212 - 207 and the Senate passed their version early this morning 51 - 44 (roll call not available yet). Sixteen Democrats in the House opposed the budget along with all Republicans and in the Senate, Sens. Olympia Snowe (R-ME) and Susan Collins (R-ME) supported the budget, while Sen. Evan Bayh (D-IN) opposed it.

The House and Senate versions are similar in a number of areas, but the House blueprint is more fiscally responsible - strictly adhering to PAYGO rules by requiring offsets for mandatory spending increases and any additional tax cuts - particularly offsetting changes to the alternative minimum tax. Way to go House of Representatives!

There were tons of amendments in the Senate all through the day and night on key fiscal issues. We'll be dissecting the amendments and votes throughout the day today here on the BudgetBlog. Stay tuned!

Posted by Adam Hughes, 09:25:16 AM

Tuesday, March 04, 2008