This pattern of claiming benefits early persists despite the fact that most people would gain financially from waiting as long as possible to claim benefits -- even up to age 70, when benefits hit their maximum. The reasons for waiting are instructive. When people were first allowed to claim benefits before age 65, their benefits were reduced so that, on average, the lifetime value of benefits would be the same regardless when they were claimed. Since then, however, life expectancies have increased, and interest rates have fallen. Both changes increase the cumulative reward for waiting -- the higher benefits continue longer because of increased longevity and deferred benefits are worth more because of the lower discount rate.
Reducing benefits only for comparatively high earners who claim them early -- say, those with earnings in the upper 30 percent of the Social Security earnings distribution, which means those with lifetime average earnings in 2011 above $57,066 -- would maintain benefits for lower earners who are least likely to have the financial means to support themselves if continued work becomes burdensome or impossible. Depending on the size of the reduction, this change could cut Social Security's long-term funding gap by up to one-half.
The 2012 political campaign froze rational discussion of Medicare -- and, alas, many other topics as well. The Republican presidential and vice-presidential candidates and their platform called for repeal of the Affordable Care Act (ACA) and replacement of the current Medicare system with a voucher plan that was simultaneously more radical than they acknowledged and less of a break from the current system than they claimed.
Once upon a time, Medicare paid pretty much whatever price hospitals, doctors, and other providers charged for whatever services they rendered. But no longer. For nearly three-quarters of all enrollees, Medicare now pays a flat fee for treating particular conditions and aggressively regulates service prices. The remaining quarter or so of Medicare enrollees sign up for one of several competing private plans that accept a flat sum for delivering services at least as good as those offered under fee-for-service arrangements. Quite simply, Medicare enrollees now have a lot of choice, and the system as a whole is based on competition. The campaign claim that it is necessary to replace the current system with vouchers in order to give enrollees "choice" and to promote "competition" was and is utterly bogus.
So was the claim that these competing private plans save money. In fact, even if one adjusts for diverse health needs and subtracts the extra payments that private plans received under the Medicare Modernization Act of 2003, the data show that competing private plans on average cost about 3 percent more than traditional Medicare does.
The Republican agenda rested not only on a factually inaccurate assumption but also on a practical and political impossibility -- repeal of the ACA. Many elements of the law are already in effect, such as the extension of coverage under parents' insurance to young adult children and added coverage of preventive medical services under Medicare. Other provisions, such as the bar on using pre-existing conditions to deny coverage or charge high premiums, are so popular that those who called for "total" repeal of the ACA said simultaneously that they would retain them. But if insurance companies are barred from denying coverage based on pre-existing conditions, then much of the rest of the law that Republicans promised to repeal must also remain. If insurers must take all comers regardless of health status, then it is necessary to mandate people to buy insurance so that they don't wait until they are sick to buy it. To require insurance coverage, it is necessary to subsidize such coverage for those with modest incomes in order to make it affordable.
The "if we can't repeal it, we'll block implementation" strategy is also a dead end, as such efforts will create chaos in the roughly 15 states that are well along in implementing the law. Furthermore, the biggest administrative innovation of the ACA -- the exchanges that will regulate the sale of health insurance -- would be key to the effective operation of the voucher plan that Republicans proposed to replace Medicare. The challenge of setting up such exchanges for Medicare enrollees would dwarf the admittedly difficult task of setting them up for the prime-age population served by the ACA. To start with the more challenging Medicare population would make no sense.
Despite months wasted debating proposals that had little chance of adoption, changes to Medicare are likely, and some are desirable. Given the desire to cut deficits soon, Medicare is just too large to ignore. Current earmarked revenues and accumulated reserves will eventually be inadequate to pay for all promised hospital-insurance benefits. Furthermore, the program suffers from genuine shortcomings.
For starters, Medicare coverage has important gaps. It does not cover the costs of very extended illnesses. It exposes low-income beneficiaries to sizable deductibles and cost sharing. To avoid them, most Medicare beneficiaries -- other than the poor, who are protected from them by Medicaid -- either buy supplemental coverage against these risks or receive it from former employers. This multi-layered arrangement adds needless, costly, and vexing complexity. Furthermore, current arrangements actually subsidize private insurance because covering deductibles and cost sharing boosts use of services, much or all of which Medicare pays for and that private insurance premiums don't cover.
Fixes for both problems are straightforward. Protection against costs of very extended illnesses could be added to the standard Medicare benefit package and paid for with a small increase in premiums for upper-income enrollees, so that the burden on taxpayers is unchanged. Those Medicare enrollees who want to avoid facing deductibles and cost sharing could be offered a "super-Medicare" option that reduces or eliminates deductibles or cost sharing, priced to prevent any increase in the net cost of Medicare to taxpayers. Premiums could be set a bit below those of current Medigap coverage because of savings from eliminating one layer of administration.
Medicare's defenders take pride in its low administrative costs. The truth is that Medicare spends too little on administration. The program could lower overall spending somewhat if it spent a bit more in certain areas. Each dollar spent on policing fraud would yield several dollars in savings. More program managers could do a better job of making sure that when new procedures are approved as safe and effective, Medicare pays only for approved cases, not for others where safety and efficacy are unproven. Tighter administration is not the financial magic bullet, but if ever the old saying "a billion here, a billion there; pretty soon you're talking about real money" had bite, it would be here.
Third, some Medicare beneficiaries can afford higher premiums than they now pay. Individuals with incomes below $85,000 and couples with incomes below $170,000 currently pay no more than 25 percent of the cost of Medicare Parts B and D, which cover doctors, drugs, and medical devices. People with incomes above those thresholds pay premiums that cover 35 percent to 80 percent of the actuarial value of coverage. It is simply not credible to argue that couples with incomes of $100,000 to $170,000 cannot afford to pay more than one-fourth of the cost of Supplemental Medical Insurance.
The most controversial proposal is to raise the age of eligibility for Medicare. This proposal is premature: If implemented now, it would expose older people who lose Medicare coverage to an increased risk of being denied private coverage altogether or facing unaffordable premiums. When the ACA is fully in operation -- which means that the exchanges are up and running and nearly all states have agreed to the extension of Medicaid coverage -- raising the Medicare eligibility age to match the "full-benefits" age for Social Security, 67, makes sense. It would nudge some people into remaining economically active a bit longer than they now do. The ACA will guarantee people coverage through its health exchanges and it will provide subsidies to make private coverage affordable for those with low or moderate incomes. More generally, the argument that in the face of ever-lengthening life expectancies, public policies should be set as if everyone should be able to retire at the same ages as in the past is untenable. It's true that calls for longer working lives typically emanate from handsomely compensated incumbents of sedentary jobs, not from those who do physical labor or perform tedious and poorly paid tasks. But that means simply that the way to shift policy is to encourage those who can afford to do so into working longer, while preserving the option of earlier retirements and the assurance of basic financial security and health-insurance protection to those who need them.
The Fiscal Effects of Later Retirement
The fiscal effect of changes in Social Security and Medicare that nudge people into working longer goes well beyond the direct impact on these two programs. Tricia Neuman and Juliette Cubanski of the Kaiser Family Foundation have shown that raising the age of eligibility for Medicare cuts government health spending only slightly. Medicare spending drops some, while spending through other federal or state programs, such as Medicaid or subsidies through the ACA health insurance exchanges, goes up nearly as much. Total (as opposed to government) health-care spending probably goes up a little, as the average per-person cost of private plans -- which more people would buy if the eligibility age were raised -- is higher than that of Medicare.
The overall fiscal effect of policy changes that cause people to retire later is much greater, however. Longer working lives mean a larger labor force. A larger labor force means higher output at full employment. And higher output means increased tax collections from individuals and businesses, as well as some reduction in government spending. In a Brookings Institution study (carried out in collaboration with the Urban Institute and Moody's Econometrics and sponsored by the Sloan Foundation), Gary Burtless and I find that if labor force participation among workers over age 55 continues to increase at the same rate observed since 1995, rather than at the slower rate of increase projected by the Social Security Administration, cumulative government revenues would rise $2.7 trillion over the next three decades, mostly from income and payroll taxes, and spending would fall about $600 billion, mostly from Medicare and Social Security savings.
For several decades support for the legislative landmarks of the New Deal, the Fair Deal, and the Great Society seemed impregnable, both in the general public and among political elites. Public affection for Social Security and Medicare remains deep and broad. But budget deficits and specific projections for Social Security and Medicare have created a widespread, if misguided, sense that we just can't go on without retrenchment.
The first line of defense should be to defend the importance of these programs and others that comprise the social safety net, and to show that they can be sustained without unduly high tax burdens. But failure to plan for what to do if some ground must be given would be an abdication of responsibility.
For supporters of social insurance, not to make such plans would leave to those programs' critics and enemies the job of designing changes that may prove inescapable. That is not an outcome that progressives should allow. Nor should progressives deny the very real imperative resulting from a steady increase in longevity: People who can do so should be encouraged to work until later ages than has been common in the past.