Entitlements Reform

This is the second part of a three-part series on how Trump can offer the country a coherent and comprehensive economic policy agenda. The first of these covered tax reform, explaining how bipartisan agreement on the contours of a desirable tax structure offer the Trump administration good prospects of giving the country long-sought progress on this front. This discussion takes up the politically more explosive issue of entitlements reform. Here there is little bipartisan agreement. There is, however, the chance of progress, because financial realities will drive action.

The crucial consideration here is that Washington is running out of time. Spending by the government on Social Security, Medicare, and Medicaid has for years outpaced just about everything else so that such outlays have begun to swallow the whole budget. Obamacare promises to accelerate the pace. So far such spending has grown from about half of all federal spending in 1980, for instance, to about three quarters in the most recent budget. Congress exercises no control over this growth, at least the way budgeting is done now. The only reason entitlements has not imposed more on most other government programs is that defense spending has shrunk from just under a quarter of the budget in 1980 to about 15 percent presently, despite all the strains from the country’s Middle East ventures. Effectively, relative Pentagon cuts have shielded much of the rest of the government from this relentless growth in entitlements. In so doing, it has allowed various politicians, including the new president, to kid themselves and try to fool the people about what they might do with federal dollars, like refurbish the nation’s infrastructure.

Since major tax hikes and deeper budget deficits are politically unpalatable, as is a continued shrinking in defense spending, at least to the extent done in the past, Washington will soon have its proverbial back to the wall. At current rates of relative growth, entitlements promise to absorb 80 percent of the budget in less than ten years and 85 percent by 2035. Even if defense spending shrinks further to a 10 percent share of the total, only 5 percent of the budget would remain for everything else. Matters are probably more urgent, as this simple extension of past trends ignores how Obamacare will accelerate entitlements spending as will the retirement of the baby boomers. The window that allows the president and Congress to ignore the matter is closing fast.

It is also clear that the public is acutely aware of this reality. To be sure, the average citizen cannot quote chapter and verse from the budget or measure past trends. Nonetheless, voters have shown conclusively that they know how little budgetary viability remains. According to a recent Rasmussen poll, only 19 percent of voters are confident that they will receive their full federal retirement benefits. A Bloomberg national poll showed an even smaller 15 percent are so confident. A Roper poll found that only 29 percent of American believe that their federal benefits will last through their retirement, down from some 35 percent only six years ago. Such feelings will or should drive politicians to action no matter how much they would prefer to ignore such matters.

It may well be that a sensitivity to this need motivated much of the objection to the largely cosmetic Obamacare reform bill. To be sure, the Freedom Caucus fought Republican leadership and President Trump on social as well as economic issues. It nonetheless also showed sensitivity to the legislation’s lack of economic viability. The proposal for instance, might have used tax credits to individuals in place of Obamacare’s more direct subsidies for health insurers, but the net effect would still have burdened the budget. Objections to community ratings also showed a recognition of actuarial reality. The replacement legislation did loosen Obamacare’s insistence that premiums for all, regardless of age and health, must remain largely equal. But it failed to loosen them enough to offer the system sustainability. It would seem, then, that any future efforts to replace Obamacare will receive a warmer welcome if they consider broader budgetary ramifications and would receive still more support if they aimed to deal with the more general entitlements problem.

Nor would reformers lack for proposals. On the contrary, there is much an offer to move this critical process forward. This is hardly the place to itemize, much less assess the many schemes that would control the growth of entitlements spending. Social Security’s trustees have placed their own on the system’s website. Among them is the suggestion to raise the age for full retirement benefits. A shift from 67 years to 70 would do much to make Social Security actuarially sound and hence lift its burden on the rest of the budget. It would also reflect a national demographic reality in which people live longer than in the past and remain vital to older ages. Other reforms advocated by the trustees and others would, for instance, change how the system calculates cost of living adjustments or alternatively how it determines the benefits paid to high-income beneficiaries.

With healthcare, whether Medicare, Medicaid, or, for the time being, the ACA, matters are less clear cut. Nonetheless, here, too, prospective reformers have much material with which to work. Allowing insurers to sell across state lines, for instance, would introduce new levels of competition that would have a tremendous potential to hold down premiums. Of course, such a move would force Washington from its clear preference to care more for the bottom lines of insurers than for those paying premiums, but the option exists. Reforming the way that the Federal Drug Administration tests new drugs offers a way to reduce prescription costs. Block grants to states for Medicaid could unleash a raft of cost saving schemes that would slow spending with no loss of services. Already, state efforts have yielded more effective ways to deliver health services, clinics, for instance, instead of emergency room calls have not only cut immediate costs but by improving prevention have held down costs over time. Similarly, if employers simply offered employees block payments for premiums, they would introduce further competition into insurance markets, impose disciplines and hold down premiums accordingly.

Legislation might make progress if it abandoned the tedious moralistic posing that has so dominated debate and instead approach such reforms more as a technical problem. So-called budget hawks could then seek expense relief for the public at large without having to fend off accusations of heartlessness. Those who worry from the other side about the quality of life among those less capable will see their help systems rest on more secure and durable footings. Though a portion of the moralizing, and the animosity it fosters, would inevitably remain, it might find fewer platforms from which to create bad feelings in Washington and among the public generally. At the same time, a turn to honesty by representatives and senators about matters of budget viability, something the public already sees quite clearly, might well defuse the ever-growing distrust of Washington. Difficult as the initial effort at such reform no doubt will be, it is essential and promises to pay considerable dividends.

 

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