The Hoax of Entitlement Reform

The Hoax of Entitlement Reform

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It has become accepted economic wisdom, uttered with deadpan certainty by policy pundits and budget scolds on both sides of the aisle, that the only way to get control over America’s looming deficits is to “reform entitlements.”

But the accepted wisdom is wrong.

Start with the statistics Republicans trot out at the slightest provocation — federal budget data showing a huge spike in direct payments to individuals since the start of 2009, shooting up by almost $600 billion, a 32 percent increase.

And Census data showing 49 percent of Americans living in homes where at least one person is collecting a federal benefit – food stamps, unemployment insurance, worker’s compensation, or subsidized housing — up from 44 percent in 2008.

But these expenditures aren’t driving the federal budget deficit in future years. They’re temporary. The reason for the spike is Americans got clobbered in 2008 with the worst economic catastrophe since the Great Depression. They and their families have needed whatever helping hands they could get.


If anything, America’s safety nets have been too small and shot through with holes. That’s why the number and percentage of Americans in poverty has increased dramatically, including 22 percent of our children.

What about Social Security and Medicare (along with Medicare’s poor step-child, Medicaid)?

Social Security won’t contribute to future budget deficits. By law, it can only spend money from the Social Security trust fund.

That fund has been in surplus for the better part of two decades, as boomers contributed to it during their working lives. As boomers begin to retire, those current surpluses are disappearing.

But this only means the trust fund will be collecting from the rest of the federal government the IOUs on the surpluses it lent to the rest of the government.

This still leaves a problem for the trust fund about two decades from now.

Yet the way to deal with this isn’t to raise the eligibility age for receiving Social Security benefits, as many entitlement reformers are urging. That would put an unfair burden on most laboring people, whose bodies begin wearing out about the same age they did decades ago even though they live longer.

And it’s not to reduce cost-of-living adjustments for inflation, as even the White House seemed ready to propose in recent months. Benefits are already meager for most recipients. The median income of Americans over 65 is less than $20,000 a year. Nearly 70 percent of them depend on Social Security for more than half of this. The average Social Security benefit is less than $15,000 a year.

Besides, Social Security’s current inflation adjustment actually understates the true impact of inflation on elderly recipients — who spend far more than anyone else on health care, the costs of which have been rising faster than overall inflation.

That leaves two possibilities that “entitlement reformers” rarely if ever suggest, but are the only fair alternatives: raising the ceiling on income subject to Social Security taxes (in 2013 that ceiling is $113,700), and means-testing benefits so wealthy retirees receive less. Both should be considered.

What’s left to reform? Medicare and Medicaid costs are projected to soar. But here again, look closely and you’ll see neither is really the problem.

The underlying problem is the soaring costs of health care — as evidenced by soaring premiums, co-payments, and deductibles that all of us are bearing — combined with the aging of the boomer generation.

The solution isn’t to reduce Medicare benefits. It’s for the nation to contain overall healthcare costs and get more for its healthcare dollars.

We’re already spending nearly 18 percent of our entire economy on health care, compared to an average of 9.6 percent in all other rich countries.

Yet we’re no healthier than their citizens are. In fact, our life expectancy at birth (78.2 years) is shorter than theirs (averaging 79.5 years), and our infant mortality (6.5 deaths per 1000 live births) is higher (theirs is 4.4).

Why? Doctors and hospitals in the U.S. have every incentive to spend on unnecessary tests, drugs, and procedures.

For example, almost 95 percent of cases of lower back pain are best relieved by physical therapy. But American doctors and hospitals routinely do expensive MRI’s, and then refer patients to orthopedic surgeons who often do even more costly surgery. There’s not much money in physical therapy.

Another example: American doctors typically hospitalize people whose diabetes, asthma, or heart conditions act up. Twenty percent of these people are hospitalized again within a month. In other rich nations nurses make home visits to ensure that people with such problems are taking their medications. Nurses don’t make home visits to Americans with acute conditions because hospitals aren’t paid for such visits.

An estimated 30 percent of all healthcare spending in the United States is pure waste, according to the Institute of Medicine.

We keep patient records on computers that can’t share data, requiring that they be continuously rewritten on pieces of paper and then reentered on different computers, resulting in costly errors.

And our balkanized healthcare system spends huge sums collecting money from different pieces of itself: Doctors collect from hospitals and insurers, hospitals collect from insurers, insurers collect from companies or from policy holders.

A major occupational category at most hospitals is “billing clerk.” A third of nursing hours are devoted to documenting what’s happened so insurers have proof.

Cutting or limiting Medicare and Medicaid costs, as entitlement reformers want to do, won’t reform any of this. It would just result in less care.

In fact, we’d do better to open Medicare to everyone. Medicare’s administrative costs are in the range of 3 percent.

That’s well below the 5 to 10 percent costs borne by large companies that self-insure. It’s even further below the administrative costs of companies in the small-group market (amounting to 25 to 27 percent of premiums). And it’s way, way lower than the administrative costs of individual insurance (40 percent). It’s even far below the 11 percent costs of private plans under Medicare Advantage, the current private-insurance option under Medicare.

Healthcare costs would be further contained if Medicare and Medicaid could use their huge bargaining leverage over healthcare providers to shift away from a “fee-for-the-most-costly-service” system to a system focused on achieving healthy outcomes.

Medicare isn’t the problem. It may be the solution.

“Entitlement reform” sounds like a noble endeavor. But it has little or nothing to do with reducing future budget deficits.

Taming future deficits requires three steps having nothing to do with entitlements: Limiting the growth of overall healthcare costs, cutting our bloated military, and ending corporate welfare (tax breaks and subsidies targeted to particular firms and industries).

Obsessing about “entitlement reform” only serves to distract us from these more important endeavors.

Robert Reich served as the 22nd United States Secretary of Labor under President William Jefferson Clinton from 1992 to 1997. He shares many of his thoughts and columns at Robert Reich, where this post first appeared.

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41 Comments on "The Hoax of Entitlement Reform"


Guest
Nov 2, 2013

Hi Renee, You can bring him to us tomorrow. We open at 10 am. Best of luck.

Guest
Jul 19, 2013

Whether Mr Reich is right or wrong, that’s not the point. But the fact that he’s bringing some insightful ideas with complementary statistics is the important part. This spurs debate and that’s what we need so we can get to the best solution one way or another. Less politics, more input. Keep it going

Guest
Apr 7, 2013

I am sorry that I missed this debate, but let me throw in a point or two in case anyone is interested…………..

1. The cost of Medicare is going up for 2 reasons:

a. demographics, i.e. more persons turning 65 than are dying, plus more
disabled persons staying on social security disability for 2 years;

and

b. higher spending per Medicare beneficiary.

The demographics are not exactly a state secret. Either we raise the elibility age quite drasticallty, or we raise taxes and raise the premiums that seniors pay.

We would have to do this even if America had the most efficient health care system in the world.

Instead we have shills of both parties claiming that today’s seniors have already paid for their Medicare………..but let me move on.

The amount that is spent per beneficiary is actually going up less than it used to. If we used the much harsher controls that you see in single-payer countries, we might be able to flatten this per-beneficiary amount altogether.

The cost of Medicare is greatly determined by what Medicare pays for and how much it pays and how many claims it pays each year.

There is nothing in the Consitution or the Ten Commandments that forces Medicare to pay for office visits, lab tests, transplants, or dialysis, or viagra.
There is nothing which forces Medicare to pay $45,000 for some bypass surgeries.

I am not making any specific recommendation here. All I am saying is that if money runs low, Medicare could stop paying for certain things. It does not pay for hearing aids or nursing homes right now. I wish it would, and I would pay higher taxes to accomplish this, but I am just one voter.

Guest
anilafafnondos
Jan 17, 2013

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Guest
Bill Katz
Jan 16, 2013

Mr. Reich says that social security will continue to be payed from the “trust fund” but the trust fund is only a bunch of IOUs that are part of the deficit.

Guest
Peter1
Jan 17, 2013

Bill, have you asked yourself why they’re IOUs and not cash in an account?

It’s because that money was used for all sorts of government spending, like roads and education, which meant taxpayers were subsidized for that spending. It was robbing Peter to pay Paul – the great game in DC because taxpayers want something for nothing, or at least the illusion of getting something for nothing.

SS is an IOU that must be paid because everyone put money into it for the promise of a minimal pension. Even you will get SS. Those saved taxes from robbing SS are now due. Pay up!

Guest
Peter1
Jan 10, 2013

” But at the root of all of it was an epic credit binge by short sighted and stupid consumer borrowers who were living beyond their means”

No, that was NOT the root of the problem. As a private lender who carries my risk I can tell you that there are always borrowers, consumer and business, who want money – it’s up to the LENDER to vet and risk assess the loan. Borrowers don’t force lenders to lend them money.

The “Banks” were not blindsided by this, they were active participants financing the subprime fraud schemes.

http://www.publicintegrity.org/2009/05/06/5555/about-project

Guest
Barry Carol
Jan 9, 2013

“the facts are that 3/4 of the wealth of this nation is held by 10% of it’s people, one tenth of which are holding over half of that 3/4 amount.”

Margalit –

Some of this issue was addressed in the recent fiscal cliff negotiations and more of it is likely to be addressed as part of tax reform. I also think the estate tax will mitigate the issue further over time.

There are already approximately 50,000 charitable foundations in the U.S. with over $400 billion of assets. Together they make about $20 billion of grants each year with at least half of that coming from the 300 largest foundations. Many billions more are controlled by colleges, universities and hospitals.

The existence of the estate tax will, I think, prevent dynastic concentrations of wealth and will ensure that much of it will ultimately find its way into foundations that benefit society while $30 billion per year of estate taxes continue to be paid by a relatively tiny number of estates as a percentage of the number of people who die each year.

The two richest Americans, Bill Gates and Warren Buffett have pledged to ultimately return 99% of their wealth to society and they are actively seeking to enlist other billionaires to eventually give away at least half of their wealth. Bottom line: I’m not as concerned about wealth concentration as you are. I do think, however, that investment income is still taxed too lightly relative to income from work and I continue to feel that way even after the recent fiscal cliff legislation.

Guest

We can quibble about who did what in the housing market forever, but the facts are that 3/4 of the wealth of this nation is held by 10% of it’s people, one tenth of which are holding over half of that 3/4 amount.

This is what is unsustainable. This is what needs to be reformed and transformed. Medicare, Medicaid and Social Security artificially heated arguments are just a side show to divert attention from the real business at hand.

Guest
Peter1
Jan 9, 2013

“but the facts are that 3/4 of the wealth of this nation is held by 10% of it’s people, one tenth of which are holding over half of that 3/4 amount.”

This was no accident of the cream rising to the top. This has been a result of legislative lobbying and back scratching. Medicare, Medicaid and SS are all that’s left to raid. Don’t expect the wealth imbalance to self correct even if Barry paints a rosy picture.

Guest
Barry Carol
Jan 9, 2013

Spike –

The 1986 Tax Reform Act was (1) revenue neutral and (2) raised taxes on the wealthiest because the capital gains rate was increased from 20% to 28% and the wealthiest among us derive most of their income from capital gains. Loopholes were also closed which disproportionately affected high income people.

The Greenspan Commission Social Security reforms effectively called on the baby boomers to pre-fund their retirement as the payroll tax was increased in either rate or the wage based to which it applied several times over the following eight years. However, I don’t think politicians of either party ever seriously contemplated establishing an actual pension fund consisting of stocks and bonds with the surpluses that were generated by the difference between payroll taxes and current year outflows for social security benefits.

I would also point out that the concept of tax reform intended to lower marginal tax rates while broadening the taxable income base was strongly supported and led by prominent Democrats, Senators Bill Bradley and Richard Gephardt and House Ways and Means Committee Chairman, Dan Rostenkowski. The latter two were both solid allies of organized labor. Democrats also controlled the House for 40 consecutive years through 1994 and controlled the Senate for most of that time as well.

Guest
Barry Carol
Jan 9, 2013

Peter1 –

Hindsight is 20-20. I think your take is pure liberal spin. The fact of the matter is that everyone involved in mortgage lending including banks, Wall Street investment firms that securitized mortgages, rating agencies, appraisers, Fannie Mae and Freddie Mac and home purchasers all behaved based on what turned out to be the wildly wrong assumption that house prices would continue to appreciate in value forever.

Nobody forced homebuyers to take out loans either to buy a house or to take cash out of a house in the course of refinancing. No homeowner who bought a house with a bank’s help and later made a nice profit ever went back to the bank and said here’s 10% of my profit; thanks for your help. When they bet wrong and lost money, suddenly they’re looking to sue the bank. Give me a break.

Implicit in bank, Wall Street, rating agency and even appraiser behavior was that in the worst case, the homeowner defaults, the house is sold for more than the loan amount, the loan is paid off, and there is something left for the homeowner. Moreover, even if house prices did decline, they would only decline in a few places and not everywhere at once. The post World War II history of housing price behavior nationally generally supported that assumption which also turned out to be wildly wrong.

Politicians pushed Fannie Mae and Freddie Mac to lower their underwriting assumptions because they wanted as many people as possible to be able to buy a house instead of just rent one. Yes, it all blew up in the end but there was plenty of blame to go around. If either Fannie Mae or the banks tried to enforce, say, a 20% down payment to get a mortgage, the politicians wouldn’t have tolerated it.

Guest
Peter1
Jan 9, 2013

“The fact of the matter is that everyone involved in mortgage lending including banks, Wall Street investment firms that securitized mortgages, rating agencies, appraisers, Fannie Mae and Freddie Mac and home purchasers all behaved based on what turned out to be the wildly wrong assumption that house prices would continue to appreciate in value forever.”

Barry, you are extremely generous explaining away fraud as a “wrong assumption.” There was no assumption, all the institutions knew exactly what they were doing. Do you think they were just stupid dupes?

There’s no liberal spin about predatory lending, liar loans, ratings fraud.

I’d do a little research, which is what I’ve done, as I’ve made no “assumptions” based on “liberal spin”.

Guest
arthur
Jan 9, 2013

Imagine if the majority could tax all minorities out of existence (not just the higher earners/producers); maybe the USA could be more like Switzerland. Alas, it would be only a matter of time before the majority tax the wealthy out of existence also, so we would follow France, et al into A United States of Mediocrity or less.

Guest
DeterminedMD
Jan 9, 2013

This is a disingenuous discussion. As long as this culture HAS to save everyone irregardless of prognosis and expense of time , money, and energy, there is no system to save or manage competently. No one has the guts nor ability to address just having a society above 300 million keep growing without realistic accountability is a fraud.

Which are these leaders in DC and cronies in the media. oh, and the partisan shrill seekers here too. Again, the resources are finite.

Is reality ever considered in these threads?

Guest
Barry Carol
Jan 9, 2013

Margalit –

When it comes to the ultra mega wealthy, I agree with you. Indeed, as you probably know, I’ve been a consistent supporter of higher tax rates on capital gains and qualified dividends within reason. However, if you look at the vast majority of taxpayers with incomes between $250K and $5 – $10 million or so, most of their income is from salary, bonus, stock options and restricted stock awards, all of which are taxed at progressive ordinary income rates. In addition, many of these people live in states like NY, NJ and CA with quite high state income tax rates as well. They’re already paying a fair share and then some in my opinion. The hedge fund and private equity moguls who benefit from the carried interest rule are in a different category and that loophole needs to be closed. There are even quite a few hedge funds types who benefit from carried interest who agree believe it or not.

On corporate profits taxes, there is a lot of debate among academics as to who actually bears the burden of this. Some think it is born by shareholders. Some think it’s pushed back onto workers in the form of lower wages. Others suggest it’s just another cost of doing business and is built into the price of the product or service the company sells. I’m in the last camp but nobody can definitively prove their case.

Guest
Cynthia
Jan 9, 2013

The medicare/medicaid problem is a distraction from the real problem, which is that a very wealthy country has a dysfunctionally expensive healthcare system that takes too much money from too many people. Expanding medicare to cover everybody would release money that is committed to health insurance plans and that now forms a considerable part of people’s compensation package. Raising the taxes for the expansion would still be a win for most people, plus, of course, the government could use its monopoly power to keep costs lower – especially as the state has the power to push back on IP monopolies used by drug companies, put more people into the healthcare work force, and cut out much of the private insurance bureaucracy.

Guest

@tcoyote: When we say that Medicare pays $120 billion for docs, is that really accurate? Don’t these billions include labs, imaging, outpatient services and whatever is not provided inside the hospital by the hospital? How much of the $120 billion is actually going to physicians? Half? If so wouldn’t this be comparable to drug costs?

Guest
tcoyote
Jan 9, 2013

See Kaiser Family Foundation link: http://facts.kff.org/chart.aspx?ch=1795

Part B is way bigger than $120 billion and includes the other things you’re talking about. IN 2011, Part B spending was about $209 billion.