Fiscal Commission Chairs' Proposal: Social Security and Medicare

A little while back, I started this mini-series dedicated to covering the proposal the co-chairs of the Presidential Fiscal Commission.  I have also been in contact with the Strengthen Social Security Coalition to advance the progressive conversation on Social Security.  So today, I will discuss the social security and health care (mostly Medicare and Medicaid) ideas provided in the co-chairs' proposal.  This is no doubt the toughest part of the report, but that is inevitable given that although social security and Medicare are not in the red as I write, they will (especially Medicare) account for our long term projected debt if nothing is done.

I'll get to the Chair's proposals in a minute, but first, let's look at why paying attention to Social Security and Medicare is necessary.  Health care more so than social security.  Although Health Care Reform succeeded in slowing the cost curve of Medicare and extending its life by 12 years, as a greater and greater percentage of our population become seniors, the burdens on these programs will be immense.  A CBO report released in June of this year puts things into perspective in the long term:

growth of federal spending (categorized, CBO projection, June 2010)

So health care spending by the federal government will dwarf everything else if no changes are made, and we will never be paying down our debt, adding more and more debt to pay interest on the debt.  Also note that Social Security spending flat-lines only because Social Security revenues flat-line, and it is by law not allowed to take revenue from other places.  As a result, once the trust fund is depleted, longer term, payable benefits are considerably less (more than a fifth less) than promised benefits.

We start with health care.

Health Care Spending

The ideas of spending reductions in health care are quite drastic and specific.  The proposal recommends reducing payments to doctors and providers and directs CMS to set up a new payment system by 2015, that presumably will reward care, not just more procedures.  This is an idea that has a lot of merit, and could potentially transform our health care system to a results based, rather than a fee for service structure.  It will depend, however, on the implementation of such a system.

There are a few very, very good things with regards to health care in the proposal: first, it requires discounts on brand-name drugs as a precondition for participation in Medicare Part D.  The health care reform law does this already, but only for drugs the prices for which happen to fall into the current donut hole.  The chairs' proposal requires an across-the-board discount on brand name drugs, period.

Second, the proposal in general empowers the Independent Payment Advisory Board (IPAB), set up by the Obama health care reform law, to force Congress tow either approve its recommendations or come up with equivalent savings.  The proposal makes the IPAB permanent, and gives it more than just advisory authority.

Last but not least, the proposal suggests that, among other things, a robust public option (i.e. a public option whose rates are based on Medicare, not a negotiated rate public option) be enacted into the health care exchanges, if cost growth cannot be reined in long term (to GDP growth + 1%).  Anyone who thought the health care law lacked cost controls because of the absence of a public option should be thrilled at this possible public option trigger.

The proposal also suggests creating a universal deductible for Medicare (although they do not say the amount), expanding cost-sharing and establishing a cap on catastrophic coverage.  These are the parts of the proposal that, in my view, are untenable.  The out-of-control health care costs should not be controlled by shifting cost onto beneficiaries of Medicare.  It may be true that an expanded cost sharing forces beneficiaries to be better consumers, but smarter consumers won't solve the problem of rising provider costs.  Bites have to be taken out of the profits of pharmaceutical companies, for-profit hospitals, and yes, other medical establishments.

What would I suggest instead?  I suggest requiring pharmaceutical companies to give all Americans the same rate they give Canadians on all drugs.  I suggest hospitals and nursing homes be required to give their "preferred rates" to everyone.  I suggest a windfall profits tax on hospitals and drug makers and medical device manufacturers.  I suggest that opt-out from Medicare and Medicaid not be an option for providers.  I suggest finding a way to incentivize healthy living so that people would require less medical treatment, and that may well include tougher regulations on the fast food industry, school lunches, and a subsidizing farmers' markets rather than big agrabusiness.

Social Security

The co-chairs' proposal on social security is actually strikingly less punishing than their proposal on health care.  There's both the good and the bad in it, and I will discuss both.

For all the bru-ha-ha that this proposal has caused, no one seems to have read some ideas that pretty good and progressive on Social Security.  First, it fulfills, for the first time, social security's mission to eliminate poverty for those who worked all their life, even if they only worked minimum wage all their life.  It establishes a new special minimum benefit, defined above the poverty level, for the workers who worked the hardest for the least amount of reward.  This is a very welcome step.  The proposal also wage-indexes the special minimum benefit, ensuring it stays relevant in the future, and the floor on benefits has a basis in wage.  It also suggests a benefit boost to older retirees most at risk of outliving other retirement resources.  The chairs had a stated goal of preventing senior poverty (as defined by the federal poverty level), and their proposal achieves that goal.

Second, the chairs' proposal also raises the social security taxable income cap to cover 90% of earnings, as opposed to the current 82.5% that it captures now.  This will require that the high income earners pay a fairer share in Social Security taxes, and increase revenue in the system.  This is a progressive step, and returns social security taxable incomes to the level of what it was when it was originally enacted by Franklin Delano Roosevelt.

One of the big points of the political shakeup over the proposal has surrounded the area of raising the Social Security retirement age.  I have previously been on record against raising the retirement age - not because raising the age means a cut in lifetime benefit (this talking point ignores the flip side of this coin, which is that every year someone lives longer is then an increase in lifetime benefits), but because while longevity has increased, the ability to work beyond a certain age for those who have to work the hardest has not.  The commission co-chairs have an intriguing solution to this: index the retirement age to longevity (so that overall lifetime benefits stay the same) but allow an hardship exemption for those unable to work beyond 62.  This means that those with the most back-breaking work will be able to claim full benefits at age 62, not just reduced benefits as is possible today.

Other than that, the rise in the retirement age is slow. It will be 68 in 2050, and 69 not until 2075, if today's trends in longevity continue.  This is not something that should be rejected out of hand.  With the hardship exemption in place for those who need it, we do need to understand that people are living longer, healthier lives.  By 2030, Americans over 65 will be 35% of people of traditional working ages.  Today, that ratio is only 22%.  Once again, with the caveat of the hardship exemption in place, it is not unreasonable to index the retirement age to longevity.

Let's keep in perspective the fact that when Social Security was enacted and a retirement age of 65 was adopted, the life expectancy was 61.3 years, younger than the retirement age.  Many will counter this by saying that even then, those who reached a certain age, lived well beyond the retirement age.  True, but the overall benefit outlays were constrained by the fact that before reaching that age, people who would not be collecting social security were still paying into the system.  Thanks to medical miracles, people live both longer and healthier lives.

Another point of contention on social security has been that the chairs' proposal indexes benefits (COLA adjustments) above the median benefit to price and not wages.  While COLA adjustments have kept many seniors out of poverty, the new special minimum benefit will make sure of that under this plan.  Price indexing for the upper half of social security income adjustments will reduce the median benefit, but by 9%, according to the Social Security Administration (see the "Shield 50%" plan, which is exactly the plan the chairs' proposal has):

Median benefit reduction on social security under PPI plans

A 9% cut from scheduled benefits as a result of COLA indexing is nothing to celebrate, for sure, but as we know already, every year lived longer is an increase in lifetime benefits.  But look at the "payable benefits" line.  That is the line that represents what would actually happen to social security if nothing is changed.  If nothing is changed, the cut will be as much as 22% in the long run.  The chairs' proposal presents it with their own chart (pay attention to the "scheduled" vs. "payable" benefits):

chairs proposal vs scheduled and payable benefits, social security

The status quo on Social Security is a cut.  A bigger cut than this proposal; a much bigger one.  So understand this: those advocating "don't touch social security" are - inadvertently or not - advocating a forced benefit cut, since Social Security is not allowed to be funded by anything except social security revenue (and the trust fund built from this revenue).

The last concern about the proposal is that it ties price indexing (not just for social security but for all kinds of indexing) to "Chained CPI," rather.  What's a chained CPI?  It is a measure of price inflation that eliminates the effects of seasonal discounts, new products, etc. and accounts for substitute products (i.e. the natural consumer choices to shift to substitute products due to price changes in a certain products - for example, if the price of broccoli suddenly skyrocketed, you might buy coli-flowers instead).  It is the proper measure of price indexing.

So all told, is this the best possible plan for Social Security?  Probably not.  If it were entirely up to me, I'd eliminate the taxable social security income cap and leave it at that.  But given even the liberal lion of FDR did not do that, there isn't much chance of that happening.  This plan might not be the best plan, but it is a serious plan that ensures solvency of social security, and stays away from right wing privatization ideas.

Conclusion

Social Security and federal health care spending suggestions in the proposal were the toughest to deal with, perhaps necessarily so given the long term cost growth  There are several ideas - especially when it comes to Medicare deductible and cost sharing, that I disagree with the Commission Co-Chairs on.  This is, however, a serious attempt to bring costs under control and ensuring the solvency of federal programs.  We don't have to accept everything they give us (I certainly don't), but the disparagement of the commission as "Catfood Commission" should stop.  Legislatively tenable solutions aren't liberal utopia solutions, but we must focus on preserving Social Security and Medicare instead of letting the depletion of the trust funds become an excuse to gut them because we do nothing while we have the chance.  The proposals are tough, and sometimes disagreeable, including to me, but they open a serious policy dialog in the middle of political screaming matches, and I appreciate that.