Wednesday, April 1, 2009

Growing Costs: The Left’s new narrative on entitlements relies on statistical sleight of hand

I have a piece on National Review Online discussing the debate over what is driving entitlement costs: population aging versus rising health care costs.

To address the rising costs of federal entitlement programs like Social Security, Medicare, and Medicaid, it's important to know what is causing these cost increases to begin with. For years, the entitlement crisis was assumed to be driven by the aging of the American population, a trend that pushes 10,000 seniors per day onto benefit rolls without balancing them with taxpaying workers. Rising life spans and lower birth rates will permanently increase the ratio of retirees to workers, driving costs — and taxes — higher.

But this view, according to a narrative now dominant in liberal policy circles, is not correct. These critics note, accurately, that costs are rising too quickly for shifting demographics to explain them entirely. But this new narrative diminishes aging's role too much, and opens the door to intrusive federal control over private-sector health care.

I argue, based on a longer article for AEI, that the role of health care cost inflation has been significantly overstated, particularly by some activists who wish to avoid tough choices on entitlements while pushing to nationalize health care for working age Americans.


Jim Glass said...

Over 75 years or the infinite horizon "excess" growth of Medicare costs dominate the costs of Social Security/aging population in computing the $53 trillion (or whatever) present value unfunded liability of the US.

BUT over the next 20 years population growth is the major factor, as you illustrate in your figure #2.

AND it is in the next 20 years that CBO projects general revenue must increase 50% (via income tax increases, if not a new VAT, whatever) to keep up with these programs' spending costs -- or, absent the tax increases, S&P projects the credit rating of the US will plunge to junk.

Now, there is not a chance under the shining Sun on God's green Earth, that anything like a 50% income tax increase or the equivalent will be enacted to cover these programs' exploding costs without them undergoing under a major restructuring.

Remember that the 1983 SS changes that closed a funding gap that was trivial in comparison to what is coming did so 50% through benefit cuts.

So the restructuring that is coming circa 2030 will be driven primarily by aging of the population -- and all projections for 50 years after that based on today's rules for these programs, that will by then be restructured we-know-not-how, are moot fantasies.

Saying that the real-world problem of an age-driven 50% income tax increase by 2030 should be disregarded because it is so "minor" compared to fantasized projections of "excess health care costs" for 2070 ... well, what should we call that?

(Perhaps, a Krugmanism!)

Andrew G. Biggs said...

Good points, Jim. If you calculate the costs increases as present values, which is standard practice for Social Security and Medicare, then aging and excess health care cost growth are right about equal contributors over the next 75 years.

But on an annual basis, aging kicks in quicker. If we don't fix entitlements by 2030 we're in a world of hurt, so ignoring population aging seems silly.

Part of the current narrative is based on substantive judgments that there are greater efficiencies to be had in health care reform, which is potentially true. But part of it also comes from a desire to put the government in control of health care, meaning it's in good part just an argument of political convenience.