Social Security and Medicare: Silly Season

One of the victims of this recession apparently is the media’s incapacity for sorting out what are longer term and therefore structural problems from those that are simply temporary and whose existence is co-terminus with the downturn itself. Yesterday’s New York Times provides us with a classic example. It contained a breathless article about the ‘fragility’ of the Social Security and Medicare programs. The conclusion of the author: that the ‘draining’ of the trust funds for these two programs presents an ‘immense difficulty’ as we try to ‘shore them up while also extending health care to millions of Americans’. The article also contains a couple of fancy charts, neither of which has any particular relevance. But they look nice.

Here we go again with the hand wringing and angst. The sky is falling in on our socialized safety net. Oh my. We had better just give in and let the market solve all our problems. Because we clearly can no longer afford Social Security or Medicare.

And the news is?

I apologize for my snark, but this is getting so old. If we are going to discuss the retirement and health care ‘crises’ we should focus on the longer term.

Let me try to explain:

• I suppose it would be too obvious to remark that the recession has drained quite a few things of resources. Like the entire planet. The IMF has calculated the banking system will lose about $4 trillion as a consequence of the downturn. American households have seen trillions cut off from their home equity and retirement funds. And yes we have seen lots of articles about this horrendous ‘drainage’. So what’s special about either Social Security or Medicare? Nothing. The funds flowing into the two programs has been severely reduced because we pay for them from employment taxes. If unemployment goes up then those taxes go down. And, boy, has unemployment gone up. But does this represent a fatal blow to the social programs? Not at all. The current negative shift in funding is cyclical. When employment recovers so will the funding. So, perhaps, we can look forward to a follow-up article in late 2010 or early 2011 that talks in equally breathless language about the sudden surge of cash flowing into the system. Presumably then there will be no difficulties with either system.
• Not. Both systems do indeed have long term issues. But those issues have absolutely nothing to do with the temporary shortfall in income due to this recession. There is no news in the cyclical problem, but there is plenty to chew on with respect to the longer term problems. And the two programs have very different problems. Social Security was designed as a pay-as-you-go system. The surge in the trust fund is a result of the demographic bulge caused by the baby boom. That population ‘cohort’ is so large that its payments more than cover the expense needed to pay for today’s current retirees. So a surplus has accumulated. But we knew all along that this surplus was an illusion. It would start to be eliminated as the baby boomers all retired. Eventually it will disappear altogether, and the program will return to its pay-as-you-go roots. The original intent of the program was that it would have a fund invested in assets just like a normal retirement fund. But New Deal politics killed that idea. Notably the Republicans back then wanted to prevent the government accumulating a substantial investment portfolio – they feared it would be so large that it would dominate the stock market – so they forced the current cash based funding onto FDR. The real issue with Social Security is that we all live longer but the program’s retirement age is still fairly low by comparison. So in the long term, about thirty years from now, the program will be threadbare. This can be fixed fairly easily by changing the rules for funding, an example would be eliminating the cap on contributions, or moving the retirement age out to a more realistic seventy years old.
• Medicare’s problems are far more serious. They have more to do with the antiquated and fragmented nature of our overall health care system. The cost of health care, and especially end of life health care, has risen dramatically. Costs are raging way above the general inflation rate, and the industry is incapable of bringing those costs under control: the market system breaks down for services like health care where incentives and costs are decoupled. We have a quasi free market for health care: consumers are shielded from the full cost of health insurance because most employers subsidize them – health insurance is regarded as a ‘benefit’ in business – with the result that the usual market disciplines are removed from the system. Since no one bears the true cost of the service no one has the incentive to control costs. Doctors can continue to dabble in high cost tests and ‘cures’ without any push back from consumers as to the true value those things represent. Insurance companies niggle about everything, but their incentive is to avoid making any payments at all so as to boost profits. So they annoy both consumers and doctors while adding enormous costs to the system without adding any benefit. Medicare exists as a social program within a dysfunctional world and cannot be sustained or fixed without fixing the wider health care system. We could abandon Medicare as being too expensive, but that would not reduce the amount of GDP we expend on health care by much. Besides any such reduction would simply be due to people not getting any health care and so would represent a significant reduction in our standard of living. This is why radical surgery on the health care system is now long overdue. At the current rate of cost inflation in health care we will be spending over one fifth of our entire wealth on it, to the exclusion of investing or saving for the future. That burden is untenable. The private parts of the system: doctors, insurers, drug companies, and so on have failed to deal with inflation and remain mired in old fashioned technology – think of all the times you have filled the same form out, doctors seem unable to share simple data. And the social parts have ben hobbled by partisan politics: the deliberate prohibition against using mass purchasing power to lower drug costs is an example.

So why do we get a breathless article now?

Shoddy analysis. The downturn in money going into our big social programs should come as no surprise. It is hardly worth noting because it is so obvious.

In a way the social programs help support the economy: we don’t cut spending when the money coming in is reduced. This automatic shift to a deficit acts as a ‘stabilizing’ force during a downturn. Indeed, some European countries have argued, rightly, that they should not use as much fiscal stimulus as we need to here precisely because their social programs provide this automatic stabilization.

“Medicare is caught in the middle of this mess. We need to extricate it quickly.”

Our problems are far more structural than cyclical. An interesting discussion is about to take place as the administration starts to get to grips with the disfunctionality of the currents system. Driving costs out of health care means less cash to go around. That should spark plenty of debate. I would have preferred the article to have focused on that. Maybe the author thought he was laying out some background for that debate. If so, he failed.

So allow me to end by highlighting what I see as a major problem we all have when we get into a health care debate. Eventually the nub of the problem is our decision as to how to allocate resources. How do we ration using a government system? Or do we ration using the market system? The outcome depends upon your faith in markets. Those of us who are pure free market believers will want to eliminate company subsidies for health care benefits to make consumers responsive to cost. They think that this will force consumers to haggle better for prices and avoid the use of unnecessary tests. As a result, such folks argue, costs will come down. The outcome of a market process, they say, will reveal to us what we collectively wanted by way of health care consumption. Those who want health care will have it, and those who don’t want it will not have it.

Those of us who have less faith in markets – chastened as we are by the banking system debacle – think the government should be more heavily involved. The consequence will be a more limited, but ‘fairer’ system that has application to a wider population.

The current hybrid system, it is neither pure market nor purely government run, is failing us and has been proven as the worst of both worlds. It is the most expensive system in the world with much of that cost absorbed by administration not the provision of care. As a consequence we do not reap the benefits of the resources we allocate to it.

Medicare is caught in the middle of this mess. We need to extricate it quickly.

How we do that iswhat I hope we will be reading about in future articles.