Chuck Blahous: Is health care reform really entitlement reform?

Here's the Hudson Institute's Chuck Blahous talking about the Obama administration's argument that the key to fixing entitlements is first reforming private sector health care.


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Got $546,668? Neither does the government.

USA Today
reports that the total obligations of the federal government, including entitlements, civil service retirement and other costs, total $63.8 trillion in present value. Your share? $546,668. Think about that when people want to add new entitlement programs rather than fixing the ones we already have.

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Jim Capretta on a fiscal wake up call

The Ethics and public Policy Center's Jim Capretta blogs at National Review on the danger that fiscal profligacy will cause a downgrade of U.S. treasury bonds:

At the end of 2008, our national debt burden stood at 41 percent of GDP. The Congressional Budget Office (CBO) expects the Obama budget plan to push it above 82 percent at the end of 2019.

And that's before the retirement of the baby-boom generation hits with full force. Between 2020 and 2030, the number of Americans age 65 and older will increase from 53.7 million to 68.9 million — a jump of 16 million over a decade.

But would a bond downgrade finally spur Congress to action? You'd like to think so. But as I argued here, under standard Social Security and Medicare accounting a financial crisis could actually make the programs' problems seem smaller and less urgent.

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Samuelson: Insolvency? Bring it on.

Newsweek's Robert Samuelson writes that if Congress only addresses entitlements in a crisis, the sooner the crisis comes the better:

Like General Motors and Chrysler, we continue self-defeating habits because we can—temporarily. These are not easy issues. But procrastination is a bad policy. The longer changes are postponed, the more wrenching they will be. The hurt for retirees and taxpayers alike will only grow with time. Social Security last faced a forcing event in 1983, when a dwindling trust fund prodded Congress to make changes. The counterintuitive lesson: a "crisis" is just what we need.

A couple thoughts. First, I was recently at a dinner with a retired very senior Member of Congress, who – like Samuelson – predicted that it would take a crisis to spur Congress to action. Congress, he said, is like a high schooler waiting until the night before the exam to study. My question – and for better or worse I voiced it – is whether we have a right to expect our elected representatives to approach issues of national importance with greater seriousness than a teenager devotes to Friday's math quiz.

Second, Samuelson's column brought back thoughts of President Bush's reform efforts in 2005, where he spent a great deal of time talking about the problem of Social Security solvency before he began to discuss reforms. A constant cry from the left (and from much of the press) was that Bush was "crisis mongering," claiming a crisis where none existed. Let's leave aside that Bush rarely if every called Social Security a crisis, while President Clinton regularly did so – and more recently, so has then-Senator Obama. My question was, are we supposed to wait until it's a crisis to act? Because at that point it would be, well, a crisis? Shouldn't we act before a crisis comes, and wasn't that exactly what President Bush was advocating?

All rhetorical questions, obviously, but perhaps still worth asking.

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The UnCOLA

I have an article in this morning's Los Angeles Times about the lack of a Social Security Cost of Living Adjustment this year.

The COLA wars

Outrage about the absence this year of a cost-of-living adjustment for Social Security recipients is based on ignorance of the system.

By Andrew G. Biggs
May 21, 2009

There's a cola war going on, but it has nothing to do with Coke versus Pepsi.

It began earlier this month when the Congressional Budget Office projected that for the first time in three decades, there would be no cost-of-living adjustment -- or COLA -- for Social Security recipients in 2010, 2011 and 2012.

These adjustments are designed to keep elderly Social Security recipients from losing purchasing power as prices rise, so it's not surprising that the initial reaction was one of concern.

"The absence of a cost-of-living adjustment ... will be a shock to older Americans already hit by plummeting home values, investment losses and rising health costs," wrote the New York Times.

Senior groups were predictably up in arms. An AARP spokesman moaned that "most seniors have never been through a year in which there was no Social Security COLA." Some liberal bloggers accused the Obama administration of betraying seniors. And there's already talk of legislation to address this perceived inequity.

But the outrage is unwarranted. It's true that most seniors have never faced a year without a COLA, but that's only because they've never experienced a year without inflation, which is what the Congressional Budget Office says is what's happening now.

The COLA is not supposed to be a "raise" in Social Security benefits, even if seniors often see it that way. Rather, when the consumer price index, or CPI, rises in a given year, Social Security benefits are adjusted upward to match that rise in inflation. If done accurately, the purchasing power of Social Security benefits before and after a COLA will be precisely the same.

Under law, Social Security benefits are not allowed to outpace inflation except in one special case: when prices fall. That's because Congress, leery of the political consequences of cutting anyone's benefit check, structured the Social Security Act so that when inflation is negative, COLAs don't go down, but they remain at zero. And when inflation is negative and the COLA is at zero, purchasing power is actually going up. If retirees understood that, they'd hope to never receive another COLA.

That's what's happening now. Rising energy prices drove the CPI sharply upward last year, and as a result, seniors received a large 5.8% COLA to compensate in 2009. Since then, however, almost that entire CPI increase was lost as energy prices dropped, and the CPI is projected to remain below 2008 levels through 2012.

In a world in which policy trumped politics, falling prices would lead to negative COLAs just as rising prices lead to positive COLAs. But that's not the world we live in.

And there's another twist: Congress also has ruled that increases in Medicare Part B premiums, which are automatically deducted from retirees' Social Security benefits, cannot result in benefits declining from year to year. If there is no COLA this year, this implies that Medicare Part B premiums cannot increase either, despite the fact that by law these premiums must finance 25% of total Part B costs.

Legitimate questions remain regarding Social Security COLAs. Many economists think that the CPI overstates inflation; if true, that means that existing COLAs are too high. Seniors groups, on the other hand, think that the CPI, based on working-age Americans' spending habits, doesn't adequately address seniors' heavy healthcare spending. By that way of thinking, the CPI may understate price increases for seniors. But these matters are entirely separate from the COLA dispute currently underway.

Groups such as the AARP are surely aware that a zero COLA actually means higher real benefits and lower Medicare Part B premiums. But the AARP nevertheless warns that seniors "feel like they are falling behind." That's irresponsible -- especially from such a powerful lobbying organization with the ability to change the debate in Washington. If the AARP seeks to be something more than a mere "union for retirees," it must use its considerable influence more carefully.

Inflation protection for retirees is important, but it's just as important not to increase Social Security benefits and reduce Medicare premiums when it's not necessary -- and when these programs are, as the federal government regularly informs us, vastly underfunded.

If Congress were to succumb to political pressure and provide a COLA when none is needed, it would only compound the problem.

One part of the solution is to make sure retirees understand how inflation and COLAs work. A second part is for Congress to say no to powerful voting blocs when they're out of line.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute and was previously the principal deputy commissioner of the Social Security Administration.

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Michael Lind weighs in again on Social Security

The other day I ran through some of the claims made by the New America Foundation's Michael Lind and, well, found them a bit wanting. (Sorry about the "lefty claptrap" line…) Since then, Lind has again written on Social Security and his arguments are typical enough of those you hear from the left that they're worth revisiting.

To start, Lind says:

Last Tuesday, just before the release of the annual Social Security trustees report, I predicted that no matter what the report contained the perennial enemies of America's most effective and efficient universal social insurance program would cite it as proof that Social Security needs to be means-tested, privatized or both. The report is in, and its contents are far from dramatic. The (dubiously) estimated date at which, absent changes, the trust fund dries up and Social Security shifts to a pay-as-you-go program paying most, but not all, promised benefits has moved up slightly from 2041 to 2037.

In the 2008 Report, Social Security's long-term deficit was 1.7 percent of payroll; in the 2009 Report, it's risen to 2.0 percent of payroll. By my math, that's an 18 percent increase. One would think that a nearly one-fifth rise in the deficit would be at least worth mentioning.

Next, Lind says:

The "unfunded liabilities" argument is … only applied to programs that, like Social Security and Medicare, are paid for by a dedicated tax like a payroll tax. The projected gap between future revenues and future outlays from this special-purpose tax is the "unfunded liability." Why do we never hear of the "unfunded liabilities" of Pentagon spending -- the third of the big three spending programs (Social Security, Medicare, defense) that take up most of the federal budget? Defense spending comes out of general revenues, not a dedicated tax.

A couple points: one reason Social Security has a dedicated tax was to wall it off from the rest of the budget. So long as it's adequately funded, Roosevelt reasoned, it would be very hard to cut the program's benefits. Fine. But the same holds true on the negative end: if the program is supposed to be self-financing, then any shortfalls are reported. I'm not sure what the problem is with that, unless Lind disagrees with how Roosevelt established the program. Second, defense spending is largely done on a year-to-year basis; at most, the government pays for a ship today that it won't receive for several years. Social Security, by contract, taxes you from the day you begin working and upon those taxes incurs an obligation to pay you benefits until you die. The 75-year reporting horizon was chosen for exactly that reason: to span the typical life of an individual entering a program, to let him know the sufficiency of the program's funding to the approximate maximum age he might live. (I can probably find this explicitly stated somewhere in the Trustees Report if needed.)

Next, Lind tackles the trust fund debate:

Cato's [Michael] Tanner does concede that the Social Security Trust Fund will pay benefits until 2037. He claims, however, that "that figure is misleading, because the Trust Fund contains no actual assets. Instead, it contains government bonds that are simply IOUs, a measure of how much the government owes the system." So government bonds backed by the full faith and credit of the U.S. government, a government that has never defaulted on its obligations in its entire existence since 1776, are not actual assets?

Imagine you're a taxpayer and you're offered two possible options: first, the trust fund is filled with U.S. Treasury bonds. When Social Security starts running deficits in 2016 it redeems those bonds and to finance the redemption the government raises your taxes, cuts other programs or increases the deficit. What this points to is that the trust fund, while an asset to Social Security, is an equal and opposite liability to the Treasury – and to you, the taxpayer. Now imagine instead that the Trust Fund held, say, Canadian government bonds. Come 2016, it's our friends up north who have to raise taxes, cut spending or run a deficit. This is the point people on the center and right make about the trust fund: not whether it will be paid back, but how. The trust fund is an asset to Social Security, but it's not an asset to taxpayers.

Next, Lind moves to reform options:

[E]ven when the trust fund runs out and Social Security becomes a pure pay-as-you-go system… lifting the cap on the amount of income subject to the payroll tax would eliminate that problem forever. In other words, the contract between elderly Americans and the rest can be honored in half a century by slightly higher taxes that would fall chiefly on much richer Americans in a much richer America."

Unfortunately, this really isn't the case. Even if we eliminated the payroll tax ceiling in 2037 – something that would radically change the nature of Social Security as originally designed – and if we didn't pay any additional benefits in exchange for the extra taxes – another blow at Social Security's founding ethos – the program wouldn't even be solvent in 2037, much less forever. That is to say, Lind's proposed tax increase, which would raise the top marginal tax rate by 12.4 percentage points, by the by – wouldn't even cover the deficit in that year.

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Obama Misdiagnoses ‘Real Deficit Threat’

Deconstructing Peter Orszag's Wall Street Journal article, over at AEI's Enterprise blog.

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