Monday, May 11, 2009

Obama Budget Office Says Aging, Not Health Care Inflation, Primary Entitlement Cost Driver Thru 2040s

As I've discussed here before, there's been some debate over the sources of future entitlement deficits: the traditional view has been that it's the aging population, which pushes more people onto the Social Security, Medicare and Medicaid rolls. A new view says the real culprit is rising per capita health care costs – called "excess cost growth" – which push up spending even if the population doesn't get older. Under the first view, the likely reform approaches are traditional ones like raising taxes, cutting benefits, increasing the retirement age or trying to pre-fund future benefits. Under the new view, only comprehensive health care reform – meaning, reform of private sector health provision in addition to government health plans – can stop rising prices.

(For background on these debates, see my longer paper here, a short article here, and a recent AEI forum here. All contain references to opposing points of view.)

The recent budget proposal from the Obama administration has an interesting chart on what's driving entitlement costs. It's on page 191 of the Analytical Perspectives (here's a link). The text accompanying the chart is pretty standard new view stuff, which is not surprising since Obama budget chief Peter Orszag is one of the most forceful proponents of the excess cost growth argument. Here's what it says:

Sources of Increased Spending for Medicare, Medicaid, and Social Security: The most important factor driving the long-run budget outlook is the excess growth of health care costs.

Population aging gets some verbiage in the next paragraph, but you don't get the sense it has the same importance.

Ok, but now take a look at the accompanying chart.

What the chart shows is that aging will be the largest driver of entitlement cost growth out through 2040 and likely beyond. You can judge for yourselves, but it seems to me that given what the chart shows the emphasis of the text could be at least somewhat different.

Over the next 30 years, population aging is our main entitlements problem and it makes sense to seek solutions that are based on the problem we have, not the problem we want to have. Without downplaying healthcare funding issues, which are significant today and will grow even more so in the future, I can't help but think that some on the left have latched onto this new view because it promotes a policy outcome they happen to favor: increased government control over private sector health care provision for working-age people. I suspect that many of these folks would favor more government control even if health care costs weren't rising.

Update: Welcome, Andrew Sullivan readers. This material can be a little dense as I've written it. Here's a link to another blog post that walks through the issues more clearly. I also wrote a full length paper for AEI on this topic, available here.


Bruce Webb said...

Can you clarify?

I see three lines and two interlinear texts. Top line goes from 11-19 percent of GDP. Below it is "Effect of Excess Growth in Health Care Costs" then below that is a gray line seemingly representing a composite of the two black lines. Below that is "Demographic Effect of an Aging Population" and then a line that goes flat after 2011 or so. It would seem intuitive to read the lower line of text as explaining the lower line and the higher line of text to label the higher rising line. Yet your claim is that "What the chart shows is that aging will be the largest driver"

I don't doubt there is something I am missing, I also don't doubt that I won't be the only one.


Andrew G. Biggs said...

The lower black line indicates the current level of spending (i.e., a baseline). The middle grey line indicates the amount of entitlement spending increases attributable to aging, while the upper black line shows the amount attributable to excess health care cost growth (meaning, per capita health inflation above the rate of GDP growth). Many folks on the left act as if aging were an afterthought and health care inflation were all that mattered, which justifies ignoring Social Security and focusing on (effectively) nationalizing private sector health care. This chart, which resembles charts I made in a previous paper based on CBO data, shows that's not really the case.

Gabriel said...

Well, let's do three things:

1) Eliminate the excess profits with a public insurance system that our inflated health care premiums go into.
2) Cut funding for people over 65 to Canada's already generous levels (40% below ours)
3) Means-test Medicare, with sliding premiums.

I don't think "folks on the left" ignore aging. They just know that senior citizens don't generally know that Medicare is funded by the government...And if you threaten to take one dollar out of their pockets, they'd go off and vote for Dick Cheney.

Want to stereotype a group so that you can attack them? Why not go after old people and their heavily-funded Medicare?

Janboy said...

I don't pretend to be conversant enough on this subject to challenge anything you have said, except how I see the graph. The middle (grey) line rises to about 12-13% and then essentially flatines. The upper (black) line continues to rise until exiting the chart at around 19%, and still rising. While the middle (ageing factor) line is higher than at present and perhaps unacceptable, it does seem to have a ceiling. The upper (health care cost factor) does not. What am I missing in the chart and/or your analysis?

Andrew G. Biggs said...

In the long term -- meaning, after mid-century -- health care cost growth is the main cost driver for entitlements in this chart. However, a couple things to think about:
First, if we don't sort out entitlements by well before mid-century they're going to go broke. So the problem we're going to have to solve over the next decade is actually primarily an aging problem.
Second, the chart does show that health care cost growth continues forever, but that's mostly just an assumption that health care always grows at a rate 1% faster than GDP. Several studies that simulated WHY health care grows at different rates have projected that cost growth will slow significantly in the long term. The reason is that, after a certain point, people don't WANT more health care and so the rate of usage slows down. It doesn't stop, but the rate of growth should eventually stabilize a bit.

Mac Mann said...

I'm one of those who was puzzled about what your graph is supposed to show. I scrutinized it long and hard on Andrew Sullivan's site before reading your decoding.

> The lower black line indicates the current level of
> spending (i.e., a baseline).

Why isn't it a perfectly flat straight line?

> the upper black line shows the amount attributable to
> excess health care cost growth (meaning, per capita
> health inflation above the rate of GDP growth).

Do you mean the difference between the upper and middle lines?

> What the chart shows is that aging will be the largest
> driver of entitlement cost growth out through 2040
> and likely beyond.

It'd help if you added a vertical reference line at 2040 to direct attention to the only part of the graph that you're focussing on. Beyond 2040 the graph does not support your point.

Andrew G. Biggs said...

Mac Mann:

My guess is that the baseline isn't perfectly straight due to issues with the model they're using to generate the figures. CBO has gone through a similar exercise and their model showed slight changes in spending even if neither the population age nor per capita health care inflation changed. If the model incorporates other issues that affect health spending -- say, women spending differently than men -- then changes in those factors can produce small differences in the spending baseline.

You're correct on the second point: the difference between the upper black line (health care inflation) and the middle gray line (aging) shows the role played by health care inflation.

By eyeballing it, aging is the predominant driver of entitlement costs through the late 2040s. Unfortunately, OMB didn't release the underlying data. Using CBO data, which assumes a higher rate of health care cost growth, aging is the biggest cost driver through 2045.

I'll put a link on the main post to some material that may explain things more clearly.

Janboy said...

Andrew, I understand your last point that the line for health care costs is a crude and unreliable projection, but the question then is why use the chart to further your argument? It doesn't seem to support it and now you are saying it is nonsense anyway.

Andrew G. Biggs said...

Janboy: I may be misunderstanding, but I don't think that's the case. This issue arose from a Dec 2007 CBO report that showed that 9 out of 10 dollars in increased Medicare and Medicaid spending are due to per capita health care cost inflation, not to aging putting more seniors on the rolls. People inferred that aging and Social Security didn't matter at all. However, the original CBO work a) didn't even include Social Security, and b) incorrectly decreased the role of aging in driving Medicare/Medicaid costs. My work has been to try to correct these impressions.

What the OMB chart shows is that for around the next 4 decades, the majority of cost increases in the three major entitlement programs will be driven by simple population aging, not by high cost inflation in the health care sector. This undermines the admnistration's stated view that health care inflation is the number one problem, demanding widespread intervention in private health care markets, and that aging isn't such a big deal. In other words, OMB's own chart undermines their arguments regarding health care reform.

Janboy said...

OK, I get that and don't dispute your overall point about the importance of aging and the administrations misrepresenting or misunderstanding of it. Not that I agree with you - or them - since I don't fully understand all the data. However, I would just emphasize that the chart does seem to support their viewpoint and not yours. Not to be obsessive about it, but unless I misread the chart, between the years 2019 (when the lines begin to diverge) and 2035, aging causes a change of approximately 2 points (10% to 12%). In comparison, and over the same time period, health care costs cause a change of about 2.5 points (12% - actually 10% but allowing for the 2% aging increase - to 14.5%), meaning that the costs part of the equation has greater effect much earlier than the 2040 date you mention. As you note, the comparison gets even worse after that.

JG said...

Draw a verticle line at 2030.

At that point "aging population" dominates cost growth as much as "excess health care expense" does in 2079.

S&P projects that even earlier than that, by 2027, on current law US Treasuries will be rated "junk". The fall in the US's credit rating starts in 2017, only eight years from now.

That will be overwhelmingly due to "aging population" costs.

To avoid that, income taxes will have to be increased by 50% (or we'll need some other source of revenue in that amount, such as a new national sales tax), by 2030.

Now believe this: There is not going to be any kind of 50% across-the-board income tax increase (or new national sales tax), without major changes to Social Security and Medicare to control their costs. Means testing, delayed retirement age, privatization, whatever, we know not what, on an major scale.

And that makes all projections of prorgram expenses beyond that time a moot academic exercise of little point.

So here's what we know: A fiscal crisis is coming in the 2030s, due to demographics of aging population running up the cost of Social Security and Medicare, and as a result these programs will be significantly changed, since definitionally that is what will be needed to escape the crisis.

Projections beyond the point of those changes are impossible.

To paraphrase Butch and Sundance, there's no point in worrying about how to carry the cost of these programs through the 2070s, because their fall through the 2030s is going to kill them (at least as we know them today).

Thus, worrying about projections of soaring health care costs 60 years from now(!) as being the "real" problem is at best naive ... and at worst a calculated political ploy to distract from the actual real problem -- the cost crunch that is heading to hit in the 2030s due to aging -- and stop current reform of Social Security and Medicare, as unavoidable as it is.

And reform is unavoidable, due to the aging population. The more the left denies it and delays it, the biggger the cost-cutting changes to these programs inevitably will be by 2030.

Thus, those on the left who claim to want to keep these programs as they are would do well to be the first to embrace reform today, to minimize these changes. But it seems like the politics of denial, delay, and "framing" comes first with them. To the extent they keep it up, they are just going to sink their own ship in the end, when the fiscal realities of the 2030s arrive.