Busting the Medicare Myths – Presentation

I gave a presentation today to the Michigan Intergenerational Network at Madonna University on the economic prospects of Medicare (U.S.). Thanks to the Madonna Univ. Gerontology Department for support and assistance.

For a downloadable and viewable copy of the presentation, see:  https://jimluke.com/course-resources/presentations/busting-myths-about-medicare/.

Why Students and Young People Should Care About Social Security

James Kwak at Baseline Scenario asks “are Social Security and Medicare programs that benefit the elderly?”  He then proceeds to answer his question with a no and lengthy (but worth reading) explanation in “The Elderly” for Beginners. I agree and I want to emphasize a couple of points he makes.

As Kwak points out, much political discussion about Social Security and Medicare tries to label these successful programs as simply benefits that the elderly are able to grab from younger taxpayers – a form of redistribution of income for charitable purposes. That’s the wrong way to think of these programs.  Other critics of these programs, particularly Social Security, claim they’re just government-run pension schemes that produce lower rates of return than private pension schemes (usually these critics are using distorted rates of return on private pensions that don’t reflect risk, but that’s another discussion).

So how should we think about Social Security and Medicare?  First off, we need to realize that “the elderly” are not some static group of people that’s different from young people, students,or middle-age folks.  The makeup of just who is “elderly” changes every year.  We all get a year older each year.  That means that if you’re a student now or young person or middle-aged person, you’ll be part of the elderly someday (unless you die first, but that’s not much of an alternative).  We all face the prospect of spending part of our lives as one of the elderly. So it’s not about the benefits to the “elderly” as if that’s some other group.  It’s about benefits for all of us, just with different timing.*

Social Security and Medicare aren’t income redistribution charities.  They’re insurance programs. The “benefit” of Social Security and Medicare isn’t just the financial checks paid each year, it’s the protection they provide to everybody, both this year’s elderly and this year’s younger workers.  Protection against what?  Well, it’s protection against some uncertainties of life and of living in our modern industrial society.  None of us knows how long we will live.  Life’s too uncertain. But unlike 200 years ago, there’s a very high probability that most of us will live longer than we can be productive and earn an income.  That means we have to make arrangement while we’re younger and working to put aside some income (savings) for use in our old age.  But how much?  That depends on three factors: what standard of living we want in old age, how long we will live, and what rate of return we can get on our savings.  While we have some choice over standard of living, we really don’t have as much we think since we don’t know what inflation will be in the future.  More importantly, we have absolutely no good idea about either how long we’ll live (and therefore need income) or what rate of return we’ll get.  You see, “long-run average” rates of return aren’t much help.  Markets fluctuate. Returns vary depending on years.  Ask people who retired in 2009 year after the stock market crash of 2008 about “long-run average rates of return”.

Social Security and Medicare are insurance programs.  They protect all of us from these uncertainties about the future.  How do they benefit workers today?  Well, for one thing, the rate of return is certain and the risk is zero.  Without Social Security workers would need to put away even more money into savings than Social Security taxes right now**.  Workers would assume a tremendous risk.  As Kwak describes it:

 would you pay 12.4 percent of your wages for roughly 40-45 years in order to get back [55% of preretirement income] for about 20-25 years.**** There are a few different ways to think about this.

… Most obviously, there is no way to replicate Social Security for yourself. You can’t find an insurance company that will sell you an annuity on Social Security’s terms in exchange for 12.4 percent of lifetime earnings, and that’s not just because Social Security exists. No insurance company could afford to offer such a product without mandatory participation, because of adverse selection; and if any insurance company does offer you such a product, you shouldn’t believe that they will still be around when it comes time to collect your benefits.

More importantly, you don’t know at age 21 whether you will be a low earner, a median earner, or a high earner, although you may have some idea. The progressive benefit formula gives you insurance against your career not working out as well as you might have hoped. Sure, if you’re a 45-year-old corporate executive making half a million dollars a year, you will be a net loser from Social Security, but that’s not the question; you can’t decide whether to buy insurance after you find out if the insurable event occurs. There are certainly some people who would opt out at age 21 if they could — notably, the scions of the rich, who don’t need old age insurance — but rationally speaking, it’s not just the people with below-median earnings potential who benefit from the existence of Social Security, it’s also a lot of the people with above-median earnings potential.

These type of insurance programs fall into the realm of what economists call “social insurance”.  That is, they only work well if everybody is covered  – all of society without some people being able to opt out.  Second, the program needs to be government operated since it’s the only organization that can be relied upon to be here to pay off. No private corporation can make that assurance.  Programs such as this work very successfully in all developed industrialized nations.

* Social Security also provides significant payments each year to younger people: child survivors of deceased SS beneficiaries and the disabled.

** There’s also a macro economic issue here.  If there were no Social Security, private savings would likely be too high to support ongoing GDP growth in aggregate demand, leading to recurring recession and slow or no growth.  

Recessions Are Matters of Life and Death

I think it’s always important for policy wonks, politicians, and tenured professors to careful when discussing recessions and unemployment.  It’s very easy from the safety of a secure income to focus on the data and the numbers.  But behind the data and numbers are real humans.  Recessions and high unemployment have real, human costs. It’s truly a matter of life and death.  This recently reported from Calculated Risk Blog shows suicides rising in connection with a poor economy:

From the CDC: CDC Study Finds Suicide Rates Rise and Fall with Economy

The overall suicide rate rises and falls in connection with the economy, according to a Centers for Disease Control and Prevention study released online today by the American Journal of Public Health. The study, “Impact of Business Cycles on the U.S. Suicide Rates, 1928–2007″ is the first to examine the relationships between age-specific suicide rates and business cycles. The study found the strongest association between business cycles and suicide among people in prime working ages, 25-64 years old.

• The overall suicide rate generally rose in recessions like the Great Depression (1929-1933), the end of the New Deal (1937-1938), the Oil Crisis (1973-1975), and the Double-Dip Recession (1980-1982) and fell in expansions like the WWII period (1939-1945) and the longest expansion period (1991-2001) in which the economy experienced fast growth and low unemployment.

• The largest increase in the overall suicide rate occurred in the Great Depression (1929-1933)—it surged from 18.0 in 1928 to 22.1 (all-time high) in 1932 (the last full year in the Great Depression)—a record increase of 22.8% in any four-year period in history. It fell to the lowest point in 2000.

• Suicide rates of two elderly groups (65-74 years and 75 years and older) and the oldest middle-age group (55-64) experienced the most significant decline from 1928 to 2007.

There is no data yet for the recent recession, but suicide rates probably increased significantly. This is another impact of the housing bubble – and there is no recovery for the families who lost someone to suicide.

The good news in this study is the long term decline in elderly suicide rates, probably because of improved access to medical care.

I agree with CR that the decline in suicide rates among the elderly from 1929 to 2007 is partly due to improved access to medical care (read Medicare), but it’s also no doubt due to Social Security.  The future seems less overwhelming when you have the confidence and security that Social Security can provide.  Unfortunately many in Washington today want to turn back the clock to an earlier era when the elderly didn’t have such security or medical care.  If that happens, we can expect suicide rates among the elderly to go back up.

I think it’s noteworthy that the connection is between suicides and recessions/higher unemployment.  It is not between suicides and inflation.  Just another reason why I think unemployment is the more serious and damaging problem of a macroeconomy.

What Budget Crisis? Let’s Do Nothing Now

My Mother was a big advocate of patience. She was the anti-crisis.  In response to any panicked concerns I had about the some “crisis” that was coming, we always counseled “we’ll cross that bridge when we get to it”.  And sure enough, there was usually either no problem eventuallly crossing the bridge or there was no river to cross.  I wish Congress and the President could heed the same counsel.

The last couple weeks have built on the hysterical “budget crisis” talk of the last few months.  Politicians of both parties have trotted out grand “plans” for how to “fix the budget” crisis. Of course, by “budget crisis” they claim to mean the deficits that the government is currently running. Make no mistake, the plans being proposed are radical changes to America’s social structure, safety net, and political economy. The Republicans in the House yesterday voted a budget to phase out Medicare. The cuts both parties are proposing will be drastic.  Education spending will be slashed. Let’s consider another approach though.  Let’s think of it as my Mother’s cross-that-bridge-when-we-get-to-it approach.  The essence of this approach is that if we do nothing at all right now or for the rest  of this decade, the problem will solve itself.  In other words, the current laws on the books will eliminate the problem.

I will explain, but first I want to make a disclaimer.  First, as an economist, I do not buy into the “budget crisis” rhetoric to begin with.  As I’ve tried to explain in other posts about MMT, fiscal policy, and the government budget, I’m not worried about the government’s current deficit at all.  In fact, if anything, I’m concerned that the deficit is too small right now.  The signs are clear that we need more government spending, not less right now.  I likewise do not think eliminating the deficit completely is a worthwhile goal. Such a goal is likely to be harmful.  

But, for the sake of argument and understanding, let’s assume for the moment that we should eliminate the deficit eventually.  What do we need  to do? Cut Medicare and let seniors eat up their entire limited incomes in healthcare costs? Hand Social Security over to Wall Street?  Close all the schools? None of this kind of radical nonsense is necessary. I will let Annie Lowery of Slate Magazine do the explaining with emphasis added by me:

 The overarching principle of the Do-Nothing Plan is this: Leave everything as is. Current law stands, and spending and revenue levels continue according to the Congressional Budget Office’s baseline projections. Everyone walks away. Paul Ryan goes fishing. Sen. Harry Reid kicks back with a ginger ale. The rest of Congress gets back to bickering about mammograms. Miraculously, the budget just balances itself, in about a decade.

I know. Your eyebrows are running for your hairline; your jaw is headed to the floor. You’ve had the bejesus scared out of you by deficit hawks murmuring about bankruptcy and defaults and Chinese bondholders. But don’t take it from me. Take it from the number crunchers at the CBO. Look at the first chart here, and check the “primary deficit” in 2019. The number is positive. The deficit does not exist. There’s a technicality, granted: The primary deficit is the difference between spending and revenue. The total deficit, the number more commonly cited as “the deficit,” includes mandatory interest payments on the country’s debt. Even so, the total fiscal gap is a whisper, not a shout—about 3 percent of GDP, which is what economists say is healthy for an advanced economy.

So how does doing nothing actually return the budget to health? The answer is that doing nothing allows all kinds of fiscal changes that politicians generally abhor to take effect automatically. First, doing nothing means the Bush tax cuts would expire, as scheduled, at the end of next year. That would cause a moderately progressive tax hike, and one that hits most families, including the middle class. The top marginal rate would rise from 35 percent to 39.6 percent, and some tax benefits for investment income would disappear. Additionally, a patch to keep the alternative minimum tax from hitting 20 million or so families would end. Second, the Patient Protection and Affordable Care Act, Obama’s health care law, would proceed without getting repealed or defunded. The CBO believes that the plan would bend health care’s cost curve downward, wrestling the rate of health care inflation back toward the general rate of inflation. Third, doing nothing would mean that Medicare starts paying doctors low, low rates. Congress would not pass anymore of the regular “doc fixes” that keep reimbursements high. Nothing else happens. Almost magically, everything evens out.

These are the CBO’s baseline projections. But, of course, Congress is not likely to let the Bush tax cuts fully expire, or slash doctors’ payments. So the CBO also prepares an “alternative fiscal scenario” that looks more like the path we expect Congress to take. It’s the alternative scenario that has the horror-show deficits. But Congress doesn’t have to act. It just has to do nothing. Or when it does do something, it has to pay for it.

That last bit is important: We want the numbers of the do-nothing path but not necessarily the policies. The fiscal future written in current law is hardly the best of all fiscal futures. For one, health care spending would comprise an enormous portion of overall spending. Right now, the United States spends about $1 in every $6 on health care. In a decade or two, based on the do-nothing plan, it would spend $1 in every $5, then $1 in every $4, and not get better health outcomes, either. Those dollars would be better spent in other industries or on other priorities. Moreover, under the do-nothing plan, the government would tax a much bigger share of GDP than it currently does, and the tax burden on the middle-class would be uncomfortably high.

But the do-nothing plan proves the point that the budget revolution does not need to be particularly revolutionary. Yes, the dollar figures are enormous, so big that it would appear to require “bold” plans that include massive new taxes or cruel new cuts. But, in fact, we don’t really need to end Social Security, sell Alaska, or ship the poor to Canada to get back in the black. We just need to stick to current law—particularly the tax and health care provisions—and then we can tinker our way toward a better, healthier economy.

That is because, by and large, the hard work of fixing the fat part of the the budget has already happened—through health care reform. The Social Security crisis you sometimes hear about is essentially a myth. The trust fund will run out in 2037, “at which point tax income would be sufficient to pay about 75 percent of scheduled benefits through 2084.” Full Social Security solvency would require only about 0.7 percent of GDP, which you can get to by exposing income above $107,000 to the payroll tax. There is no debt crisis, either, as long as the U.S.’s lenders remain confident in the country. The crisis lies in spiraling health care costs. The Obama health care reform bill might not work, but it does contain programs that could turn the tide over time. The big wheels of deficit reduction are already turning—and it might be better for Congress to step back, stick to pay-as-you-go, and let them turn.

Yes. Annie is right. And Mother was right.  If we do nothing, then the deficit disappears because of laws already on the books and what Annie doesn’t mention: regaining full employment.  The sooner we regain full employment, the sooner the deficit disappears, assuming we leave the tax code and Medicare and healthcare and Social Security laws as they are right now.

So why is everyone in D.C. all agitated about the “budget crisis”? Two reasons. First, what they really want to do is to continue to lower tax rates for the very rich and the wealthy. The rich, after all, pay for lavish parties through lobbyists and pay for campaigns.  You and I don’t.  Lowering tax rates for the rich will create larger budget deficits. The Republican/Ryan plan to end Medicare is not a plan to “save” Medicare or to “fix the budget”.  It’s  a plan to cut medical care for seniors so that taxes can be cut on the highest income bracket payers, the rich.  Second, some people, particularly the Republican/Tea Party/Libertarian side of the aisle are actually trying to accomplish an ideological agenda.  They don’t like the welfare state. They are ideologically opposed to government services for anyone other than elites and wealthy. They have no chance of getting political support if they actually tell the truth about their agenda.  So, we have a fake crisis to solve.

Real Causes of Federal Spending Growth: Military and Healthcare

Kash at Streetlightblog and Angry Bear explains easily with one graph both how the federal budget got to be in such imbalance (deficit) relative to GDP and how insignificant the so-called “massive stimulus” was in 2009-10.

I think that when trying to understand the federal government’s fiscal situation, at least on the spending side, it is more informative to see how we got to where we are. We now have an on-budget (i.e. excluding the Social Security program, which continued to run a surplus in 2010) deficit of about 9% of GDP. In the early 2000s, the budget deficit was about 4-5% of GDP. That’s deterioration in the on-budget deficit of about 4-5% of GDP between 2003 and 2010.

Now take a look at the following chart, which shows federal spending on actual goods and services broken into two pieces: spending related to defense, and spending related to everything else. Then I’ve added federal spending on the two Meds: Medicare and Medicaid. (Note that this latter category is actually a transfer payment, not spending by the government on goods and services, since it takes the form of the government reimbursing individuals for medical spending that THEY have done.)

Defense spending has gone up about 2 percentage points since the early 2000s. Med+Med spending has gone up by about 2 percentage points since the early 2000s. All other federal spending has meandered feebly between 2% and 3% of GDP. That slight lift in the green line in the last two years is the “massive” stimulus, or put another way, what “out of control government spending” apparently looks like.

If it weren’t for increased defense spending and the Meds over the past several years, the federal government’s budget balance would have been pretty close to unchanged. Despite the most severe economic downturn in 70 years.

I say again: what stimulus?