Are the entitlement programs in trouble?
Not immediately. But spending on Medicare, Medicaid, and Social Security is on an unsustainable trajectory, eating up an ever-larger chunk of the federal budget and adding to the government's ballooning deficit. Today, 46 percent of the government's non-interest spending goes to the three safety-net programs. By 2030, they will consume 61 percent, thanks to retiring baby boomers and skyrocketing medical costs. "Even if you love these entitlement programs, at some point they begin to crowd out everything else," said Tim Penny, a former congressman who served on President George W. Bush's Social Security commission. "There's an immorality to that."
Would it help to raise the retirement age?
Some say that's only fair, since we're living longer. But it may not help much. According to the Congressional Budget Office, gradually raising Medicare's eligibility age from 65 to 67 would save about $148 billion through 2021, but would only reduce Medicare costs by about 5 percent over the longer term. That's because 65- and 66-year-olds are relatively healthy and cost Medicare the least of all beneficiaries. Social Security's full retirement age is already headed toward 67; if it were further pushed to 70, spending would decline by about 13 percent by 2060. But some economists have argued that such a change would disproportionately hurt lower- and middle-income Americans, since increases in life expectancy are concentrated among the affluent, and less-well-off seniors rely more on the safety-net programs.
What about limiting benefits for the well-off?
Means-testing Social Security won't save much, since just 2 percent of Social Security benefits go to seniors with annual incomes over $100,000. A study last year by the Center for Economic and Policy Research concluded that denying or lowering benefits to the wealthy would have little or no effect on the long-term viability of Social Security. Medicare, by contrast, has been means-tested since 2003. People making more than $85,000 a year ($170,000 for couples) pay higher premiums for doctors' services, and as a result of ObamaCare, some affluent beneficiaries now pay more for prescription drugs. But a study by the Kaiser Family Foundation concluded that even more rigorous means-testing of Medicare benefits would save only $36 billion through 2019. Democrats worry that if wealthier Americans don't benefit from Medicare, they'll turn against it altogether. "I don't want to see Medicare turn into a welfare program," said Rep. Keith Ellison (D-Minn.).
What other reforms might help?
Social Security can pay full benefits through 2033 without any changes, and studies suggest that relatively modest changes would put it on sound financial footing for years to come. Changing the formula for annual cost-of-living increases could save more than $100 billion over the next decade. Social Security does not currently levy payroll taxes on income over $110,100; simply removing that ceiling would close the program's solvency gap for the next 75 years. But Medicare is a different story. Retiring baby boomers will swell the rolls of recipients from 49 million today to 80 million by 2030, and Medicare spending is rising even more steeply: It's projected to double to $1.1 trillion by 2022, from $560 billion last year. President Obama has argued that the best way to keep Medicare solvent is to bring health-care costs under control through government oversight and more efficient delivery of care. Republicans would like to reduce costs by giving beneficiaries a fixed sum to pay for private insurance premiums, which they say would foster more competition and push prices down.
Why haven't the programs been fixed already?
Most Americans say that they want to reduce the deficit, but no one believes their own benefits should be cut or taxes raised. Voters almost always oppose the kinds of major reforms that would make entitlement programs more solvent, and politicians know they will be punished for suggesting them. As a result, elected officials keep kicking the can down the road. Now, however, there are members of Congress on both sides of the aisle who say it's time to stop pretending that these programs are sustainable without reform. "Those who say don't touch [entitlements] aren't dealing with reality," said Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee.
Could reforms happen now?
Republicans have said they will only agree to tax increases in the fiscal cliff negotiations if major changes to entitlements are made. So far they haven't specified what those changes should be, and liberal Democrats have pushed back hard against cuts in Social Security and Medicare. But during last year's failed debt-ceiling negotiations, President Obama reportedly offered Republicans several entitlement compromises, including an increase in the eligibility age for Medicare and tighter cost-of-living increases for Social Security benefits. Those offers could return to the table. "Entitlements are eating up the entire budget," said Jim Kessler of the moderate Democratic think tank Third Way. "We've got to figure out a way to afford the safety net we spent a century trying to create."
The political perils of reform
Tampering with entitlements can be hazardous to a politician's health. In 1989, Rep. Dan Rostenkowski (D-Ill.), then the powerful chairman of the House Ways and Means Committee, was chased down a Chicago street by elderly constituents furious over his support for the Medicare Catastrophic Coverage Act. Designed to protect seniors from catastrophic medical expenses, the act passed with bipartisan support in Congress, but some seniors were outraged that it was to be financed by a surtax paid by the wealthiest 40 percent of beneficiaries. With the crowd shouting "Coward!" and "Impeach!," Rostenkowski had to cut through a nearby gas station and sprint to his waiting car. One elderly protester threw herself on the hood to prevent his escape. "That was the first signal a lot of us had that this was really a third rail," said Rostenkowski's longtime press secretary, Jim Jaffe. Three months later, the act was repealed.
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