Tuesday, December 14, 2004

Greg Ip Earns a Voxy

Brad DeLong often titles his posts "Why Oh Why Can't We Have a Better Press Corps?", and Andrew Sullivan often names his posts after and gives awards in (dis)honor of journalists who make outlandish statements. I would like to introduce my own award--the Voxy--to be bestowed occasionally on journalists in the mainstream media who make exceptionally lucid and thoughtful contributions to the public discussion. Feel free to e-mail me with nominations.

The inaugural award goes to Greg Ip, for his article in yesterday's Wall Street Journal, Medicare Ills Make Social Security Look Fit. Read the whole thing. I'm just going to focus on some excerpts that show why the article is noteworthy. Greg begins with an observation:

Reforming Social Security occupies countless scholars, commissions and legislators. Reforming Medicare, the program that could really wreck the budget, gets almost no attention at all.

He's right. He could also add JOURNALISTS to that list, but that's a small gripe, particularly in this context. He continues:

The mismatch between the programs' problems and the energy devoted to them is striking. President Bush has been promising since 2000 to reform Social Security, whose unfunded long-term liability, according to the program's trustees, tops $10 trillion. Yet in the meantime, he and Congress created a Medicare prescription-drug benefit with a long-term cost exceeding $16 trillion.
Yes, that's basically right, too. According to the 2004 Medicare Trustees Report (see Table II.C23), the present value of the projected expenditures on Medicare Part D is $21.9 trillion, or 2.4% of GDP. (I would have called this the long-term cost.) Beneficiariy premiums and state transfers are projected to offset $3.6 and $1.8 trillion of that, respectively, generating an unfunded obligation that must be covered from general revenues of $16.6 trillion (after rounding), or 1.8% of GDP.

There are two caveats to comparing this $16.6 trillion directly with the $10.4 trillion in unfunded obligations for Social Security. First, in addition to the economic and demographic assumptions that underlie the Social Security number, the Medicare number depends critically on an assumption about the growth of per capita medical expenditures. The disparity could be higher or lower than $6.2 trillion even if the $10.4 trillion projection is completely accurate. Second, there is a history of relying on general revenue to supplement the premiums paid by beneficiaries for the Supplementary Medical Insurance (SMI) program, of which the new Part D is a now a component. Some general revenue financing appears to be part of the design.

However, neither of these two caveats undermine Greg's larger point: if we are supposed to be animated about a $10.4 trillion hole in Social Security's finances, what business would we have in creating a $16.6 trillion hole in Medicare's finances? And for pointing out that inconsistency, Greg earns a Voxy. Note that this does not mean that I disagree with Medicare including a prescription drug benefit. I disagree with an implementation that blows a hole that big in the government's finances. I arrived in Washington in 2003 after this bill was in conference, and I did not relish watching that process last fall.

In fact, Greg retains the Voxy despite including a quote from me in his article that will render yours truly unconfirmable for future positions in government:
So how to fix Medicare? One way is to raise the age at which retirees qualify for benefits, as is often proposed by Federal Reserve Chairman Alan Greenspan and others for Social Security. "Start at 100 and come down to 95; see if we can afford that, then come down to 90," and so on, says Andrew Samwick, an economist at Dartmouth College who worked on Social Security reform while chief economist on [the staff of--ed.] President Bush's Council of Economic Advisers. "There is some age at which the system is in balance."
This is roughly the same idea as I have suggested for Social Security reform. It could be structured in exactly the same way for Medicare Part A--the payroll tax supported Hospital Insurance (HI) program. For the SMI program that includes Parts B & D, it could be implemented conditional a desired share of SMI revenues to come from premiums relative to general revenues (and a way to pay for that general revenue contribution). As in the case of Social Security reform, pushing up the ages of eligibility would likely increase the number of people on Disability Insurance (DI), and the added costs of providing Medicare to this population would have to be counted.

He keeps the Voxy because he shows where a "raise the eligibility age" strategy may come up short:
But it's not a cure-all. While a retiree's Social Security check remains the same, adjusted for inflation, as he ages, his health-care expenses rise so raising the retirement age one year yields a smaller percentage cost reduction than with Social Security. And it's politically unpalatable.
Greg's right again. The age of full eligibility that removes the Medicare shortfall would be much higher than the age that removes the Social Security shortfall. Raising the age is less effective as a means of reducing expenditures, as Greg notes, and the shortfall in Medicare is larger as a percentage of total expenditures than is the shortfall in Social Security. Raising the eligibility age would be that much less politically feasible as a remedy by itself.

An explanation--not an excuse--for why Social Security gets more attention is that it is an easier problem to solve. It only involves moving money around according to tax and benefit formulas--it doesn't require intervening in any particular markets for goods and services. This doesn't mean that it has gotten no attention. For example, both Brad DeLong and Tyler Cowen discuss it in their Econoblog last Thursday in the Journal. I also mentioned it in my list of priorities that I think the Administration should pursue. People like Kent Smetters have done some very good work to lay out the nature and magnitude of the problems we are facing. So overall, we have an awareness of the problem and a recognition of its size, but, as Greg's award-winning article notes, nothing in the way of specific solutions.

Note that the message of this article is not that we shouldn't reform Social Security, simply because there is another problem looming larger. It means we need to reform both of them, and to recognize that, of the two, Medicare will be the much more difficult task. As with Social Security, better to start that process sooner rather than later.

Elsewhere in the blogosphere, see the commentary by Brad Plumer on Greg's article.

Other blogs commenting on this post


Jake said...

I think that this drug coverage will cost the taxpayers less than everyone expects.

A number of drugs reached the market in the 90s that replaced operations or were an alternative to an operation. The drugs were much cheaper than the operation but still were expensive. It is possible that doctors recommended operations over drugs because Medicare did not cover the drugs. Now the drugs will be picked over operations and billions will be saved. This trend to replace operations with drugs is accelerating and thus taxpayers’ paying for drugs seems a fair and cost effective thing to do.

In the 80’s drug companies learned how to synthesize drugs to treat specific conditions in the body. This discovery brought forth a flood of expensive new drugs in the 90s that were very effective in treating many conditions. The patents on these miracle drugs are expiring in the next few years and thus will be much cheaper. Cost estimates do not take patent expirations into account.

Jake said...

Bush ran on and sent to Congress a bill that would only pay for the 25% who cannot afford private drug insurance. The satisfaction with private drug insurance is high so there is no need to replace it.

The Democrats did not want a prescription drug bill because they were planning on painting the Republicans as starving old people because no drug bill was passed. So the Democrats went about destroying the bill

First, Senator Kennedy threatened to filibuster the drug plan if it did not include the rich. (More proof that the Democrats are the party of the rich and powerful). Republicans took out means testing.

Then Daschle threatened to filibuster unless two poison pill amendments were added to the bill. Those Daschle amendments made the plan unmanageable and unaffordable. The Democrats were gleeful because they were sure they killed the bill.

But the Republicans suckered them. Much to the shock and awe of the left, the Republicans slapped a start date of 2006 on the drug bill and passed it.

All Republicans and all Democrats in DC know the bill has to be rewritten. In the end, I think we will end up with Bush's original bill which is a great solution to the problem.

JG said...

"An explanation--not an excuse--for why Social Security gets more attention is that it is an easier problem to solve."

Yes ... but I am reminded of Moynihan's comment to the effect that if the political system can't even solve a problem as simple as Social Security's, then it has no hope at all at solving one that is so much more complex as well as so much bigger, Medicare.

I mean, look at all the people who are in denial about Social Security's $10 trillion -- proposing no solution of their own to deal with it, while undercutting everybody else's? Do we really expect these people to jump to the front of the charge at reforming Medicare??

The fact is that there are millions and millions of citizens out there who really think there is no real problem at all with Social Secutity -- you can find them in the comments of every blog that discusses the subject, including this one in the recent past -- and who haven't thought *at all* about Medicare.

As long as they are out there, there will be politicians and political groups out there too playing them with the "they want to cut your benefits!" card to obstruct *any* kind of reform -- just as there are now.

As to Moynihan's comment, there is something sound to be said for starting off with a poltical objective that is achievable first, and then moving the electorate along the learning curve.

There is a big educational process needed here, millions of people in the electorate will have to realize that the free lunch they are expecting will be more expensive than they want to pay for, before the opportunisitic obstructionists to all reform lose thier influence over them.

As I've said before (everywhere I go) I really don't see why the Treasury doesn't prepare honest-by-the-private-sector's-standards financial statement that use accrual accounting to show net entitlement accruals as expenses in national income. Just publishing them to supplement the government's cash basis accounting on an informational basis would be very educational for a great many people.

I mean, I know why a lot of Congress people wouldn't like it at all, but really, it's time. It would, for example, stop the NY Times editorial writers from claiming that paying $1 to eliminate a liability of $2 present value is a net cost of $1.

As to trying to reform Medicare first because it's a bigger problem, I say fine *in principle*. If possible, by all means do so. Get people talking about it.

But ... I see some people jumping on this line now who until now have been in denial about SS, having nothing to offer for it.

Now they are saying: "Gosh, SS is so simple and small a problem it's not worth it to even propose a solution for that mere $10 trillion shortfall. We really are obliged to drop that and move on to Medicare -- for which we *also* don't have any proposal, and which is going to require us an awful long time to think of one, because it all is so complex ...."

... Which is just a slightly more sophisticatedly spun obstructionist attempt to have nothing done about anything.

So I say, focus the poltical efforts on Social Security first. It's simple enough so that average people can learn to understand the issues, and for the political system to actually get something done about it.

While doing Social Security, educate people about how all these same issues will be coming up with Medicare in a bigger way, and prepare things so the next president might be able to begin to do something about that four years from now.


Anonymous said...

Puhleez. The so-called Social Security shortfall is currently estimated to begin in 2042. 2042! In 38 years! Seven trillion of the estimated 10 trillion is beyond 75 years from now. Some crisis.

Ten years ago the shortfall was projected to occur within 29 years. So the state of the fund is improving. This is re-estimated every year. And despite our crummy jobs situation the current best guess is that next year's estimate will push start of the fund shortfall further into the future.

And, as Kevin Drum, Max Sawicky and others have clearly explained, applying the same rosy expectations to the Trust Fund as are used to justify privatization renders the shortfall non-existant.

This Trust Fund shortfall BS ignores two other, very serious, more immediate problems: the General Fund (our operating deficit) that has been trashed by Bush & Co, and Medicare. The General Fund will start repaying its Social Security obligation in 2018, the end of which in 2042 is the alleged start of the 'crisis'. 2018 is a lot closer than 2042. And Mr. Bush' Big Pharma/HMO welfare bill, otherwise known as the Medicare Drug bill, pushed the estimated shortfall of Medicare to 2019. Again, a lot closer than 2042, and a whole lot bigger.

The current Republican posturing on Social Security is just partisan politics. It is about taking care of the base, not protecting the retirement security of working Americans.

As Professor Samwick has capably explained, fixing the shortfall is quite easily done, and does not require privatization. I agree with him, the sooner the solution is implemented, the less drastic it has to be.

However, I do not trust our government with too much of my money in any circumstances. And the current administration is looting our future. Anyone fool enough to believe their fiscal & Social Security BS deserves to be separated from their money. And anyone who takes Grover Norquist seriously is trying to destroy Social Security and Medicare, not save it.

I have not seen this proposed, so I will: pick a reasonable Social Security Trust Fund shortfall horizon. I would suggest 25 years. It is my understanding that the projection has never been this low in the 21 years since the Greenspan Commission started all this. Should the shortfall be projected to occur within this horizon, adjustments (via a higher percentage tax, a higher cap, reduced benefits, extended retirement age, or some palatable combination) should be made to reset it to beyond 25 years. Repeat every year. I would also like to propose that if the Fund shortfall is projected to fall beyond 50 years that an immediate tax cut on the employee portion of FICA (and the equivalent in SECA) be enacted to drop the projection to less than 50 years.

I prefer the Trust Fund to run reasonably, but lean. Pouring money into the Fund just allows our gutless and unethical politicians to ignore the problems in the General Fund.

And we need to start work on fixing Medicare and the General Fund, immediately.

Anonymous said...

And here is another proposal...

As we all presumably know, the Social Security system is a pay as you go, intergenerational transfer system. This allowed the first retirees to retire with making only a token investment and helped ease the pain of the Depression on the elderly. In 1983 Mr. Greenspan, Mr. Reagan and both sides of the aisle in Congress changed the system to a 'pay as you go plus some extra' system to accomodate the Baby Boomers.

Thus was born the Social Security Trust Fund, a set-aside to accommodate the Boomers who could not be handled by a simple transfer from subsequent working generations. About $150 billion is added to this Trust Fund every year although the amount will diminish until 2018 when it will start to run a net deficit. (The Boomers will be retiring.) In 1982 it was arranged that the Fund be set aside in notes held by the General Fund, i.e the Trust Fund holds General Fund debt just like China and Japan do.

The problem with this is our gummint accounts for the Trust Fund paper in a manner differently from that held by China. The Trust Fund surplus becomes a wash with the equivalent General Fund debt and thus obscures the true magnitude of our operating debt.

It seems to me that if the stock market was such a great deal that the honest and intellignet thing to do would be take the entire yearly surplus, stop buying US treasuries and invest it immediately in quasi-governmentally managed index funds. Sort of a Fannie Mae for investing the Trust Fund in the stock market. And we need to take the Trust Fund out of the General Fund books in something roughly akin to honest accounting.

We only have 14 years for this to make a difference, so get cracking!

I have read a few vague allusions that the Clinton Administration proposed something like this. I also have no illusions that the current thieves in DC would consider any such proposal, especially since it minimizes the opportunity for pillaging to enrich the base.

Anonymous said...

From the news like care about medicare ive been reading, looks like alot of people even with medicare are going to canada for the cheaper generics. Whats going on in America