Shah: For Our Future

Fiscal sustainability needs to be a priority.

by Rachna Shah | 3/2/18 12:30am

From their experience during exams or competitions, students are used to the pressure of the clock. Yet the U.S. national debt clock brings pressure to an entirely new level. Those who observe it are immediately drawn to the $20 trillion figure on the top left. Boston University professor Laurence Kotlikoff estimated that the U.S. government had unfunded liabilities worth close to $210 trillion. Fiscal sustainability is not a complicated concept — it is a term that describes whether or not the government is capable of maintaining its policies and programs without risking insolvency or defaulting on its promises. With programs such as Social Security and Medicare driving costs higher, change is imperative.

Five years ago, a class of college students developed a plan to balance the federal budget. The studies did so by “lifting the Social Security eligibility age to 70, cutting Medicare spending by 10 percent, ending the war on drugs and decriminalizing marijuana [and cutting] 10 percent in defense spending.” Out of these four options, the changes to Social Security and Medicare made the largest fiscal impacts. Both Social Security and Medicare part A, which covers hospital care and nursing home care, are primarily financed through the payroll tax through contribution rates of 12.4 percent and 2.9 percent, respectively. In comparison, Medicare Parts B and D are financed through general government revenue and patient premiums; thus, they do not face the financing challenges that Part A does. Social Security is projected to become insolvent in 2034 and Medicare in 2029. Action cannot wait until these years — it must begin today.

Approximately one in five Americans and nine of 10 individuals age 65 and older receive Social Security benefits. Seventy-two percent of benefits are directed toward retired workers and their dependents, 16 percent toward disabled workers and their dependents and 13 percent toward survivors of deceased workers. If someone is below the full retirement age and begins collecting benefits, that person will receive 75 percent of monthly Social Security benefits. Once the person reaches full retirement age, regardless of her earnings, she will receive the full monthly benefits. Social Security full retirement ages are gradually growing, from 66 years and two months in 2017 to 67 years in 2022. At the same time, since 1983, there has been a four year increase in life expectancy in America. In addition, more individuals are beginning to collect benefits than those paying into the pay-as-you-go system; this phenomenon has been declared “a war on children.” The average return for 401(k) plans was 4 percent after inflation; Social Security’s was approximately 2 percent. There are many proposed remedies: increasing payroll taxes from 12.4 percent to 16.4 percent, decreasing retiree benefits, raising the retirement age by four years to 70, placing greater weight on individual savings accounts and other solutions.

Medicare spending represents 20 percent of national health expenditures, or $672.1 billion, and 15 percent of total federal spending; growth in spending is 7.4 percent each year. At 3 percent, the primary driver of this growth is projected enrollment growth from an aging population. Medicare advantage has grown from 15 percent of benefit payments in 2006 to 30 percent in 2016. According to the Committee for a Responsible Federal Budget, changes can be made to improve quality without reducing health care benefits. Limiting medical malpractice claims could save between $50 and $70 billion. Establishing a cap on damages and attorney fees would reduce premiums and perhaps discourage physicians from practicing defensive medicine.

While balancing the budget through Social Security and Medicare changes can theoretically be done, political considerations and gridlock prevent such proposals from passing. Whereas Social Security reforms largely focus on the structure of the program, Medicare reforms focus on health delivery, thus bringing different stakeholders into the process. Nonetheless, fiscal sustainability is a bipartisan issue that is about bridging perspectives and building systems that will work today, tomorrow and for future generations. As Medicare and Social Security place significant pressure on the budget, they may increasingly crowd out spending on discretionary spending and policy issues. If citizens care about other issues and want more funds allocated toward them, calling for Social Security and Medicare spending decreases may facilitate that. As Americans grows older and our demographics change, economic growth is projected to slow. The country needs to make changes for the future before it is too late.