Editors' pick: Originally published Oct. 27.
The topic of entitlements was a major issue in last week's debate, but in many ways, it was not handled in a particularly sophisticated manner. In last subject of the evening, moderator Chris Wallace asked each candidate to outline their plans for Social Security and Medicare, saying in relevant part:
"The Committee for ... a Responsible Federal Budget has looked both of your plans, and they say neither of you has a serious plan that is going to solve the fact that Medicare's going to run out of money in the 2020s, Social Security is going to run out of money in the 2030s, and at that time, recipients are going to take huge cuts in their benefits."
This is all technically true, so far as it goes, but it also leaves a lot out. Social Security and Medicare are huge programs with many moving pieces, and a lot of outside factors influence their longevity.
While no one can argue the math, that at current rates of spending both programs will run through their budgets in the next few decades, just looking at tax/spend ratios is far too simplistic. For example, here are four important topics that generally go unspoken on the subject of entitlement reform:
There is no "bankruptcy"
It's common shorthand to talk about Social Security and Medicare going bankrupt, and doing so on a predictable timetable.
This, while a convenient shorthand, is simply not true.
Neither of these programs is bound for insolvency. What politicians mean when they say this is that entitlement programs are currently spending money faster than they're taking it in, and without any changes will eventually have to reduce benefits. "The long term scaling back of Social Security" doesn't have quite the same note or urgency as "bankruptcy" though.
Both programs are funded by special payroll taxes instead of out of the general fund of income tax, so there's less flexibility when it comes to reallocating money. If a destroyer comes in over budget, the Pentagon or Congress can simply shift some funds around from general spending. Entitlements, on the other hand, are largely locked off in their own financial bubble.
What does that matter? First, because it means that we don't necessarily know what the future holds for these programs. Financial growth could boost payroll taxes, while falling medical costs could slash expenses, either one of which would extend the lifespan of the current funding models.
Second, and arguably more importantly, it means that both Social Security and Medicare have a lot of available fixes. It's not that these programs are doomed to fail so much as that they have a very rigid, proscribed funding model Congress could change any time it wanted to.
Still a problem, but much more manageable when you think of it that way.
Inequality is a major part of the shortfall.
A lesser known aspect of Social Security's payroll tax is that it comes with an income cap. Workers pay 7.65% of all income up to $118,500, after which the tax falls off (with some small remainder for Medicare).
The reason for this is to remain true to Social Security's roots as a retirement program which all Americans fund and all Americans collect from. Politically, Democrats have long hesitated to raise this income cap out of fear that the public will start to see this as a safety net or wealth-transfer program, undercutting its popularity.
Yet as income gains have been disproportionately clustered at the top over the past few decades, the cap has had the unforeseen side effect of limiting Social Security's growth. Although funding should keep pace with Americans' salaries, lately its tax base hasn't reached high enough to capture where most income growth has actually gone.
"Roughly half of the problem is due to slow and unequal wage growth," said Monique Morrissey, an economist with the Economic Policy Institute. "Because it's a pay-as-you-go system, where current workers are paying for current retirees."
"Slow wage growth is a problem, but unequal wage growth is a big problem because there's a cap on taxable income," she added.
It has been, Morrissey said, one of the biggest unsung causes of the Social Security shortfall. The program depends on economic growth to fund the next generation of retirees, but most recent gains have taken place beyond the reach of the payroll tax. The result has been to limit the program's growth… and create a very real funding problem.
Immigration is great for Social Security
As noted above, Social Security depends on economic growth. With the average beneficiary collecting somewhere between 30% and 200% more than they paid in, the system depends on a its tax base to make up those numbers.
One way to accomplish that is by expanding the taxable workforce. Yet with Americans having fewer children and the Baby Boomers representing a unique generational tidal wave, finding enough young, working-age talent is becoming an increasing demographic challenge. That problem is only getting worse as the number of workers-per-retiree falls.
Currently there are just 2.9 workers supporting each retiree, and some projections suggest that could get as low as 2.0 by 2030.
Immigration is great for boosting a working population, Morrissey said. Immigrants are generally younger, with decades of earning potential ahead of them, and demographically speaking tend to have larger families. The upshot is a veritable fountain of youth, boosting America's tax base for Social Security.
Although Morrissey also cautioned about reading too much into the demographics of the Baby Boom event. The number of retirees might look unsustainable right now, but this is also a singular issue rather than a new normal.
"The older population is not going to inexorably grow compared to the younger population that fast," she said. "The huge rise in the senior to younger generation had to do with the Baby Boomer bulge, so you have this one-time sharp rise in the ratio of seniors but then afterwards it quite levels off."
ACA and Medicare
The Affordable Care Act has been very good for Medicare.
The link between these two programs is often overlooked, because the ACA is primarily thought of as a mechanism for providing insurance to underserved populations, but that's not the program's only function. The other major goal of the ACA was to slow down the growth of medical spending, and at that it has been remarkably successful.
The industry term is "bending the curve," and it describes the modest goal of not making health care cheaper but simply cutting the rate at which it gets more expensive.
Well, according to numerous studies that's exactly what happened. Take, for example, this study out of the Urban Institute, which found that between 2014 and 2019 the U.S. is on track to spend $2.9 trillion less on health care than it would have absent the ACA. That's an enormous amount of money, and a lot of those savings will come from the nation's biggest health care provider: Medicare.
According to Alice Rivlin of the Brookings Institute, one of the signature elements of the ACA is "a series of demonstrations and other efforts to try and deliver health care more efficiently."
"There've been lots of demonstrations of different ways to structure the delivery system," she said. "Accountable care organizations and bundled payments, that sort of thing. [It's] mostly a work in progress, but there has been considerable diminution in the rate of growth of health spending."
All of that is great for Medicare's longevity. As health care spending on seniors has increased, as well as the rate of chronic and lifestyle-related diseases among Americans (both of which trend towards expensive, lifelong treatment), Medicare's costs per person have soared. That changed right around 2010 when spending per beneficiary started falling for one of the first times in program history.
Now, Rivlin was quick to point out that while Obamacare has a role in this, the extent of health care reform is uncertain.
"Nobody's entirely sure," she said. "It's partly the new cost consciousness brought on by efforts under the ACA and all of these demonstrations and so forth, [but] some of it is pry the residual effects of the recession, which reduced the demand for health care, and some of it is probably low inflation."
Still, we can't ignore the fact that Congress passed a law designed to save money on health care, and shortly after its kicked in cost projections began to fall. For Medicare, a program facing long term spending problems, that's extremely good news.