• Entitlement reform and the motivation of the least worst

    In Democracy, Henry Aaron argues that progressive should support (some) entitlement reform. With respect to Social Security, a few tweaks on revenue go a long way.

    Gradually raising the fraction of earnings subject to tax from the current 84 percent of earnings to the historical target of 90 percent of earnings, boosting the payroll-tax rate from 6.2 to 7 percent, and taxing currently exempt cash compensation would fully close Social Security’s projected long-term financing gap.

    Nevertheless, he says progressives should accept some “modest and well-targeted net benefit cuts.” I’ll get to why later.

    Medicare is a more interesting case. Earlier this year, Henry and I coauthored a NEJM Perspectives piece and argued that now is not the time for premium support. With that off the table for Henry, he’s more comfortable with raising the age of Medicare eligibility. I have the exact opposite view. I’m more interested in entertaining a complete premium support proposal than raising the Medicare age. I think the former could do some real and lasting good, though an incomplete version could do some harm. I think the latter addresses nothing of import to the health care system.

    So, why does Henry suggest progressives should support raising the Medicare age and reducing Social Security benefits for some? With respect to Medicare, he makes arguments about longevity and work incentives. They didn’t convince me in the form presented in his piece. But he’s not shy about his other motivation. It comes early on and again at the end.

    But while reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget—currently 50 percent of noninterest spending. Furthermore, the phrase “entitlement crisis” has been repeated so often and so earnestly that denying its reality is more likely to damage one’s own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities—the need to secure majority support for measures to lower deficits once economic recovery is well advanced—make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives. [Emphasis added.]

    This is argument by political realism. Too many people believe we must do something. So, it might as well be the least harmful thing, because that is at least something. I can’t argue with that logic except to say that one must guard against a self-fulfilling prophesy. How many Henry Aarons for (or against) something appreciably raise (or lower) the chances of it?

    I suppose one can also disagree on what is least harmful. Henry is probably right that premium support is more risky, even if he would concede it could be done well (not suggesting he would concede that).

    In the end, I could definitely be for doing something, but it really pains me that it has to be “least harmful.” I wish we could both do something and do something that is, on net, helpful. Political constraints can be perverse.

    I recommend reading Henry’s piece in its entirety.


    • Absent politics I think that we could agree to:

      Pay all SS recipients the same amount in retirement (no reason that those who eared more should get more, FICA is really a tax not a contribution to a retirement annuity)

      Roll SS into the income tax (or better yet a progressive consumption tax).

      Roll all government healthcare into one program and negotiate fro the lowest prices. That includes Medicare, medicaid, veterans care, Government employees health insurance.

      Eliminate care that does not show strong evidence of net benefit

      Reduce the excesses of occupational licensing

      Fix bad regulations

      But that is not the world we live in and politics make those all non starters.

    • Consumption taxes are a great way for the rich to dodge taxation. Register your jet in the Caymans. Buy your yacht in the Turks and Caicos.

      When I lived in high-VAT countries, we bought the vast majority of our clothes and electronics in the US. As did many of the high-tax country citizens when on vacation in the US.

      Consumption taxes hit the people who can’t shop globally the hardest. And VAT is an accounting nightmare.