By: Rob Oldham
The United States is bankrupt. More than $17 trillion in national debt and a budget deficit that has ballooned by nearly $1 trillion in the past 45 years speaks to this. A leading cause of our fiscal ineptitude is a divided Congress’ inability to reign in entitlement spending, or mandatory payments due to enrollees no matter what the economic outlook or government’s intake of tax revenue. Entitlement programs that date back to the New Deal and the Great Society have outgrown the context in which they were passed and now threaten future generations (i.e. our generation) with financial disaster. Major entitlement programs include Social Security, which pays out retirement benefits, Medicare, which subsidizes seniors’ medical care, and Medicaid, a health insurance program for the impoverished. These programs are highly controversial and, despite what fiery partisan rhetoric proclaims, reforming them is no simple process. The following examples exemplify their complexities.
Chained CPI
Social Security benefits to retirees increase every year due to inflation, a process through which the purchasing power of the dollar is weakened by increases in the prices of goods. Inflation is tracked by the Consumer Price Index (CPI) every year. The chained CPI calculates inflation at a much lower rate than the traditional CPI. The result is that retiree benefits will increase much more slowly than they have in the past, effectively diminishing their incomes.
By “chaining” increases in benefits, the money flowing into entitlement program trust funds would increase relative to the amount flowing out. This idea is highly controversial, however. The CATO Institute predicts miniscule savings of only $130 billion over the next ten years. Considering our 2014 deficit will be roughly $700 billion, the chained CPI savings amount to little more than a “drop in the bucket”. Moreover, President Obama recently dropped the chained CPI from his fiscal year 2015 budget proposal due to concerns that decreased benefits would further disadvantage Americans who are dependent on Social Security for survival. This reform appears to be headed back to the shelf for the time being.
Raising the Medicare Eligibility Age
The Medicare health insurance program pays for nearly half of the medical costs of enrollees. This child of the Great Society is growing faster than every other entitlement as healthcare costs increase and the baby boomers reach the retirement age. Medicare’s current eligibility age is 65, making the program prone to the rising life expectancy conundrum through which average Americans live for almost 14 years after becoming eligible (this was not as much of an issue when life expectancy was shorter in the 1970s). If the eligibility age was raised to 67 on a graduated scale, the Congressional Budget Office predicts seven-year savings at $19 billion. This would also decrease Social Security outlays as more people would delay retirement in order to be simultaneously eligible for both programs.
This plan has two major drawbacks. One is that seniors who are below a certain income level would simply trade their loss of Medicare benefits for Medicaid benefits. This would put more stress on states, who share responsibility with the federal government for Medicaid. The other is that the Affordable Care Act will soon require all citizens to have health insurance or pay a penalty. The federal government is offering subsidies to purchase health care plans off state and federal exchanges. Increased Medicare payments and the subsidies that seniors will be eligible for during the two year waiting period will largely offset any of the already meager savings from pushing back the eligibility age.
Changing Medicaid’s Structure
Medicaid picks up healthcare costs for 50 million Americans living below a certain income level. It is predicted to grow larger than Medicare, and carries greater public support than any other entitlement program due to its support for the poor. Still, Medicaid brings deep financial issues into the 21st century, with 23 states reporting expenditure shortfalls. One reform proposal suggests turning the program’s implementation and direction over to the states completely, with the federal government merely providing formulaic block grants based on population. Florida Gov. Jeb Bush carried out a pilot program in 2005 that provided health care to seniors based on state standards rather than the federal ones. The innovative provision of the pilot program was to let states make decisions regarding eligibility and what types of health care payouts would go toward. The logic behind the program is based on an individual state’s supposed ability to determine citizens’ needs better than the federal government’s one-size-fits-all guidelines. Costs were said to have decreased by $161 million. On a national scale, this could erase $91 billion from the deficit.
Unfortunately, giving states more Medicaid discretion empowers them to make significant cuts if they choose to do so. The federal government would be powerless to stop them. A particularly tricky issue is that 6 million enrollees are elderly and confined to nursing homes. The elderly are very politically active and have much to lose from Medicaid decentralization and downsizing. As Paul Ryan discovered in the 2012 elections, advocating plans that could potentially decrease benefits for the elderly is a significant political liability, making state-based reform an elusive goal.
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Hopefully outlining the pros and cons of these assorted plans has made it clear that entitlement reform is not an easy issue to tackle from either a financial or a political perspective. Cutting spending without harming the interests of the disadvantaged is difficult enough. When complemented by a polarized political environment adverse to compromise and congressmen whose supreme goal is reelection, the reformation of fiscal policy culminates in a devastating gridlock. Still, Americans need to realize that the upcoming bankruptcy is no small matter and is not so insignificant that it can be kicked down the road again.
Lack of compromise is the fatal flaw in the current political system. The fiscal battles over the last four years have revealed a growing chasm between Democrats and Republicans, each refusing to blink first. A deal regarding entitlements will have to be brokered eventually if the United States is going to remain an economic leader in the world. No matter how unpopular entitlement reforms might be to some people, the aforementioned reforms and many sacrifices like them deserve serious consideration by our federal leaders.The global economy, national workforce, and thousands of bondholders depend on the United States remaining financially secure. Sooner or later, Congress must realize that entitlements have become dangerously unsustainable and that political games are a secondary concern when compared to financial solvency for future generations.
