Our long-term federal budget is completely unsustainable. The problem is so large and the possible solutions so contentious that this matter will likely constitute the single biggest issue in future federal elections. As such, it is important that we frame our choices very clearly. The question is not whether we will help the poor, as some pundits have wrongly framed the issue, but how quickly we will allow health care spending for the elderly to rise, and how we will go about allocating this spending.
Entitlements, not welfare spending, are the cause of the long-run budget problems. The federal government spends a much larger amount on entitlements than on welfare. Over the past decade, entitlements have accounted for 45 percent of federal spending. In contrast, welfare spending has accounted for only 11 percent of federal expenditures. Furthermore, in the future, entitlement spending will grow much more rapidly than welfare spending.
The overwhelming majority of Social Security and Medicare spending goes to retirees, and a quarter of Medicaid spending goes to people 65 years or older. So, while the federal government does redistribute wealth from high-income earners to the poor and lower-middle class, the largest transfer of wealth is from working-age individuals to retired individuals.
The crux of the budgetary problem is Medicare. As of right now, Medicare will pay for any and all treatments that a doctor deems "medically necessary." Due to an aging population and increasing health care costs, this program is fundamentally unsustainable. Any serious, long-term budget proposal must therefore find a way to say "no" to some of the more expensive treatments that would otherwise be covered.
Rep. Paul Ryan, R.-Wis., and President Barack Obama both recently presented proposals that would, in fact, begin to say "no." According to both proposals, working-age taxpayers will no longer be asked to pay for every medical treatment that retired Americans may desire. Thus, the question is not whether the federal government will restrict health care spending, but by how much and by which means.
To be clear, neither Ryan nor Obama is proposing that the federal government limit how much an individual may spend on health care (as is the case in Canada). They are merely proposing changes in how taxpayer money is spent.
There are two primary differences between Ryan and Obama's Medicare proposals. The first is how fast they would allow Medicare spending to grow. Under Ryan's proposal, Medicare spending would grow at a rate equal to inflation. Poor retirees would receive more in Medicare spending than middle class and rich retirees. Total federal taxes could therefore be kept at their post-WWII average of 18 percent of GDP.
Under Obama's proposal, Medicare spending would grow at a rate equal to the rate of GDP growth plus 0.5 percent. All retirees would receive the same level of Medicare spending, regardless of income. Because he supposes that Medicare spending will grow more quickly (faster than average incomes are growing), Obama also proposed significant tax increases on the middle class. Higher taxes on the rich alone would not provide enough revenue. Thus, in comparison to Ryan's proposal, Obama's proposal would mean higher taxes on working-age middle-class individuals to support higher Medicare spending on middle-class retirees.
The second difference between the proposals is the means by which they would allocate Medicare spending. Ryan proposes that Medicare funds be given directly to seniors, who would then buy their own health insurance. Obama, on the other hand, has proposed that the Independent Payment Advisory Board recommends which treatments will be paid for by Medicare and which will not. Unless Congress overrules the Board, these recommendations would automatically go into effect.
The fundamental choice that we face has nothing to do with our anti-poverty programs the federal government spends much less on welfare than on entitlements, and welfare spending is growing less quickly. Instead, the real questions facing us are twofold: First, do we want middle-class, working-age taxpayers to pay an ever-increasing share of their incomes in support of health care for seniors? Second, who will determine how Medicare's funds are spent? Should a panel of experts determine which procedures are covered and which are not, or should retired people be able to make these decisions for themselves?
