A Plan to Cut Social Security and Medicare That Even Liberals Can Love

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The peril to entitlements has been overstated by the likes of Paul Ryan, but progressives can no longer ignore the need for smart reform. Here's how to do it.

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Robert Galbraith/Reuters

Something wonderful happened in the United States during the middle third of the 20th century. After decades of policies that smacked of Social Darwinism, our country created a strong, if incomplete, social-insurance safety net. The actions our government took expressed a solemn promise to vulnerable Americans. Social Security and Medicare assured the elderly and disabled basic cash income and health care roughly similar to that enjoyed by the rest of the population. They lifted the elderly and disabled from a status of privation to near equality with the nonelderly in both money income and access to health care. Various other federal programs provided food, housing, and educational support, or encouraged their provision by state and local governments. By official measures, poverty among the elderly fell below that of other age groups thanks to Social Security, and health coverage improved markedly for the nonelderly poor because of Medicaid.

Now, in the second decade of the 21st century, these advances are under attack and that solemn promise is in jeopardy. To be sure, these programs enjoy enormous popularity. At the same time, however, a solid minority has never accepted the idea that taxes should be used to pay for pensions and health insurance. As long as economic growth generated enough revenue to pay for these programs and the rest of government's commitments, opponents of social insurance and other elements of the safety net gained little political traction. Three deficit-reduction plans enacted during the presidencies of George H.W. Bush and Bill Clinton, along with sustained economic growth, produced budget surpluses in the late 1990s and early 2000s.

But then everything changed, and the national debt ballooned. The recessions of 2001 and 2007-2009 led to higher unemployment and lower revenues. Imprudent tax cuts slashed revenues still more. Wars in Iraq and Afghanistan following the tragedy of 9/11 led to huge increases in military spending. As a result, large and seemingly limitless deficits emerged, and budgetary angst has become epidemic.

In addition, official projections have warned that retiring baby boomers and rapidly rising health-care costs will cause Social Security and Medicare benefits to greatly outpace program revenues. Although these long-term forces have little to do with current budget deficits, they have combined to generate a sense of fiscal crisis. On top of this comes the "fiscal cliff," the concatenation of dubious fiscal decisions timed to take effect almost simultaneously. Although tax cuts enacted during President George W. Bush's first term were prevented, the payroll-tax holiday enacted in early 2011 expired on December 31, 2012. The government debt will soon breach the ceiling set in August 2011. Mindless spending cuts passed in 2011, based on formulas that pay no heed to the relative importance of programs and that have nothing to recommend them other than simplicity, are to begin on March 1, 2013.

Analysts agree that if the expenditure cuts take effect, economic activity will slow, and a weak recovery will morph into recession. Failure to raise the debt ceiling would wreak tsunami-like devastation on financial markets that would inundate the rest of the U.S. and world economy.

Against this backdrop, the American public is being told that the cause of looming financial catastrophe is an "entitlement crisis." Fiscal Jeremiahs warn that the only way to deal effectively with current deficits is to cut back Social Security, Medicare, and Medicaid years in the future. The full House of Representatives has twice passed budget plans, crafted by Budget Committee Chairman Paul Ryan, that would replace Medicare with a voucher that beneficiaries could use to buy either private insurance or a plan like traditional Medicare. The Ryan plan would also convert Medicaid into a block grant at spending levels well below what is projected under current law. The grants would not increase during recessions when Medicaid enrollments tend to spike. States, pinched by falling revenues and rising service demands, would have to cut benefits just when they are most needed.

But while reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget -- currently 50 percent of noninterest spending. Furthermore, the phrase "entitlement crisis" has been repeated so often and so earnestly that denying its reality is more likely to damage one's own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities -- the need to secure majority support for measures to lower deficits once economic recovery is well advanced -- make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives. To begin this search, one should start with the underlying economic and demographic forces that are driving spending.

Demographics and Entitlements

Three demographic facts are key. Longevity is increasing. In contrast to the past, when life expectancy increased due mostly to declining mortality rates among infants and the young, almost all current and future longevity gains will occur among the old. Large groups of Americans are not sharing in these longevity gains.

Life expectancy has risen throughout most of the industrial era. But the character of that increase has changed profoundly, as documented by Stanford health economists Karen Eggleston and Victor Fuchs in theJournal of Economic Perspectives. For most of history, high infant and early-childhood mortality meant that most babies didn't live to grow old or even to child-bearing age. Only 40 percent of babies born in 1900 lived to age 65. Mortality before child-bearing age explains why high birth rates led to little or no population growth. In the early and mid-twentieth century, that changed. Major public health and medical advances -- notably, improved sanitation and diet, and antibiotics -- caused mortality from infectious diseases to plummet. Now, more than 80 percent of babies are expected to live to age 65.

As mortality rates for young adults approach zero, most longevity gains have to occur among the old. As Eggleston and Fuchs show, that is just what has been happening. The share of longevity gains among those over age 65 has risen from one-fifth at the start of the twentieth century to 80 percent now, and the share is rising.

For the past couple of decades, these gains have been unequally shared. Research by University of Illinois at Chicago public-health professor S. Jay Olshansky and his co-authors documents that most longevity gains have accrued to the well educated. Those with little education are actually dyingyounger than they were in the past. A pre-existing longevity gap is expanding with alarming speed. Between 1990 and 2008, life expectancy at age 25 among white men and women with less than a high-school education fell 3.3 years and 5.3 years, respectively. Part of the reason for this drop may well be that those with less-than-high-school education rank lower on the socioeconomic scale now than they did even two decades ago, but much of the shift is a mystery. Among white men and women with at least a college education, life expectancy at age 25 rose 4.7 years and 3.3 years, respectively, over that period. In 1990, life expectancy at age 25 for white men with at least a college education was five years more than it was for those with less than a high-school education; by 2008, the gap was 13.1 years. For white women, the gap shot up from 1.9 years to 10.5 years.

Even at age 65, the relative gaps remain jarringly large. In 2008, for example, white men with a college education or more had life expectancies five years, or 35 percent, longer than those without a high-school education.

As is well known, whites on average live longer than do blacks. That gap has narrowed somewhat over the last two decades. For reasons that are not well understood, Hispanics have longer life expectancies than either non-Hispanic whites or blacks.

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Henry J. Aaron is the Bruce and Virginia MacLaury senior fellow at the Brookings Institution.

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