Pragmatic conservative Herbert Stein gave us the Law: “If something cannot go on forever, it will stop”. What that implies is, actions will be taken. It also implies they are unlikely to be immediate.
On Dec. 3, shortly before the “Fiscal Cliff”, the Government Accountability Office (GAO) released new estimates of the federal government’s long-term budget outlook. These numbers will not be changed much by the deal Congress so embarrassingly arrived at just after we went off the cliff. We are still following trends that cannot continue.
Examining them in the order they appear in the table below; first Social Security (S/Sec). Spending will grow by almost a quarter as a % of GDP as baby boomers retire and average life expectancy continues to increase, then stabilize at that level. S/Sec revenue is at this time higher than spending but that will not continue if no action is taken. S/Sec tax used to be levied on 90% of covered earnings. That has fallen to 84% because most wage gains in recent years went to those making more than the maximum taxable income. Raising the maximum so the share of covered earnings goes back to 90% would eliminate almost half of S’Sec’s projected long-term deficit. Other small changes would fix the rest of the potential problem.
“Medicare, Medicaid and other health” spending now totals 4.7% of GDP, almost the same as S/Sec. But at 8.2% it has almost doubled by 2030 then it continues to climb steadily to just under three times today’s level six decades out. That’s the good news. The bad news is our total healthcare spending is 17% of GDP. “Medicare, Medicaid and other health” spending is barely a quarter of the total. Medicare spending will grow as a higher % of our population reaches 65, and Medicaid will grow unless wages increase at the low end and unemployment drops, but those increases are relatively small in the context of our overall healthcare system.
We spend twice as much per capita on healthcare as the next highest nation, 48 million Americans have no health insurance, and other first world nations get better healthcare results. If the 8.2% of GDP we’re projected to spend on “Medicare, Medicaid and other” in 2030 was our total healthcare spend, we’d be in great shape but it’s nowhere close. Although the rate of increase for “Medicare etc” does not need to be cut drastically and it must be done, our healthcare system is far from easy to change.
Bypassing net interest for a moment, we find “All other spending” falls. It will be worthwhile to examine some line items inside this category in another post. Is it, for example, a good plan to keep cutting spending on education? Is it a good plan to continue making war in Afghanistan? Those questions and more are for another day.
By far the greatest problem revealed by the GAO analysis is how our growing annual deficit drives an insane rate of growth in interest costs. The deficit grows because while spending increases steadily at rates that are too high but not alarmingly so, revenue stays at its historical average around 18% of GDP. That drives ever increasing cumulative debt, the interest on which more than doubles from 1.4% of GDP this year to 3% in 2020 and is almost five times as high only a decade later. Even those numbers are only if the federal government continues to be able to borrow at 1.3% through 2017 and 3.7% in the long run, which is not possible.
Stein’s Law tells us that because the deficit cannot continue to grow as it does in the GAO’s projection, it will not. The reason it reaches the impossible height in this projection is because relatively small growth in big spending programs like S/Sec and Medicare compounds into big numbers. In the same way, relatively small changes in the growth rate of those programs would result in big long term changes in the deficit.
And therein lies the problem. The Congress that raises taxes and cuts benefits will suffer politically. Future Congresses will be the ones to get the benefits of lower deficits. If today’s Congress does not take action, future Congresses will be forced to respond to their society’s pain from high inflation and/or high interest rates. But we in today’s society are not feeling those pains, so there’s no motivation to act now. What we are suffering from is low growth but there’s no quick fix for that and many ways we might attack the deficit would likely cut growth more.
Congressional inactivity is something that cannot go on forever but it looks unlikely to stop soon. They blundered over the fiscal cliff. I expect them to blunder through at least the next debt ceiling. Deficit reduction is not likely in the near term.
Note: The GAO document is at http://www.gao.gov/assets/660/650466.pdf
Here’s an article by Robert Reich that discusses some of the solutions to Medicare/Social Security.
I came to the same conclusion as Reich. The media barrages us with solutions. I wanted to identify the biggest problems and what causes them because that’s the only way to see what really could be solutions.
The impact of operating our federal budget at a loss every year is the biggest problem. I wanted to understand why Congress doesn’t fix it. It’s because those who do the fixing will likely lose the next election. The benefits will go to those who replace them.
Maybe I didn’t make clear enough that Social Security is not one of today’s problems. It does not add to the deficit. We should take action now so it does not contribute to the deficit in future but that’s very different from saying it’s a problem now.
The main solution so we don’t have a future S/Sec problem is to raise the ceiling on income subject to Social Security taxes. Reich makes important additional points about why reducing cost-of-living adjustments for inflation is such a bad idea. The median income of Americans over 65 is less than $20,000 a year, almost 70% of them depend on Social Security for more than half of that, and they spend far more than anyone else on health care whose costs are rising faster than overall inflation.
Reich makes excellent points about health care. Our federal government spending on “Medicare, Medicaid and other health” is driven by fundamental problems in our overall healthcare system. The incentives are wrong. We have a “fee-for-the-most-costly-service” system, not one focused on getting healthy results.
Reich gives examples. (1) Although 95% of cases of lower back pain are best relieved by physical therapy, because there’s not much money in that, our doctors and hospitals prescribe MRIs and refer patients to surgeons who often do even more costly surgery. (2) Our doctors hospitalize people whose diabetes, asthma, or heart conditions act up and 20% of these people are hospitalized again within a month. In other nations nurses make home visits to make sure people with such problems are taking their medications. Ours do not because hospitals aren’t paid for that. (3) One third of our nurses’ hours are spent on documentation for insurers. Our healthcare system has huge costs collecting money from different parts of itself – doctors from hospitals and insurers, hospitals from insurers, and insurers from policy holders.
As Reich points out, Medicare not only isn’t the problem, it could be the solution. It’s administrative costs are around 3% versus 5% to 10% for large companies that self-insure, 25% or more for companies in the small-group market, and 40% for individuals.
Maybe I should also have pointed out that our budgetary approach to Social Security, for example, is fundamentally different from how we manage military spending. We collect revenue to match our Social Security spending. We no longer collect revenue to match our military spending. We financed WW1 and WW2 spending with War Bonds but only increased the deficit to pay for war in Iraq and Afghanistan. That is a very bad idea.