What should be done about the federal entitlements spending that is threatening the long-term solvency of the federal government?—Posner

The future is clouded, but it is hard to find a convincing reason to believe that entitlements spending by the federal government will not continue to increase unless there are significant changes in such programs. 

An “entitlements” program is simply a program not financed by annual appropriations by Congress, with the result that its beneficiaries are entitled to their benefits rather than being at the mercy of legislative whim. Of course Congress can alter, or even if it wants abolish, an entitlements program (alter social security for example by raising the eligibility age), but that requires passing legislation, whereas a program financed by annual appropriations requires annual legislation to continue the program. The beneficiaries of entitlements are thus protected by legislative inertia, which makes it difficult to abolish or even alter programs legislatively; whereas programs can easily by starved when they depend on an affirmative annual grant of money by Congress. 

Yet it would be a mistake to convert the entitlements programs to annual-appropriations programs. That would create uncertainty that would make it very difficult for people to plan for retirement or make decisions regarding savings and health insurance. But the result of the entitlements nature of programs like social security and Medicare is that spending on them grows  fromyear to year if the number of beneficiaries grows, or if, as in Medicare and Medicaid, the entitlement is not a fixed sum of money but a service, and in the case of health care a service likely to grow in cost from year to year. The increase in beneficiaries is the primary driver of cost of the two major entitlements programs—Medicare and social security. The beneficiaries are denominated by age, and the old-age population is growing, seemingly inexorably. The 65-and-older population was 4 percent of the total U.S. population in 1900, 12 percent in 2000, and it is almost 14 percent now—which means that it has grown by 15 percent in the last 13 years. There is no sign, or reason to expect, that it will not continue growing at a fast clip, though the rate of future growth cannot be accurately estimated. 

Medicare, Medicaid, and social security now account for more than 40 percent of total federal government expenditures; when other entitlement or quasi-entitlement programs, like food stamps and the Earned Income Tax Credit, are included, the total rises above 60 percent. This means that significant annual increases in entitlement expenditures will have a significant effect on overall federal expenditures. Unless tax revenues grow as fast, which is at best uncertain, the government’s huge debt will grow relative to the economy as a whole, requiring either substantial cuts in other federal expenditures or higher taxes, or some combination of cuts and higher taxes. (Growth in the national debt per se is harmless; obviously the national debt is going to be greater in 2014 than it was in 1790. It is the ratio of debt to GDP that counts.) 

Apart from political resistance, and the resistance put up by legislative inertia to reducing entitlements benefits (for remember that reducing them requires the enactment of new legislation), it is difficult to think of ways of reducing entitlements that are likely to be effective. It is frequently argued that increased longevity justifies raising the age of eligibility for full social security benefits from 67 to 70. The problem is that many people in that age range have serious health problems, and for that or other reasons a very strong need or desire to retire, and this means that if applications for social security disability benefits (that is, for commencement of social security benefits before the normal eligibility age, upon proof of physical or mental inability to obtain full-time gainful employment) will soar—and the cost to the government of processing disability applications (which requires determination of disability) greatly exceeds that of processing an application for normal social security benefits, which basically requires only proof of age and some information about employment history. 

The controversial Affordable Care Act (“Obamacare”) aims at reducing medical expenses, but at the same time envisages a vast increase in the number of Medicaid recipients. That vast increase might not increase aggregate medical costs, if it resulted in a healthier population and relieved pressure on hospital emergency rooms, which are very costly to operate. If aggregate medical costs fell and the population became healthier and as a result economically more productive, then so long as the aggregate benefits exceeded the increase in federal outlays, that increase wouldn’t matter—the federal debt would not be growing relative to the economy as a whole. And that as I said is what matters. 

But a healthier population means more old people. And more old people means greater outlays for social security and Medicare. Increases in longevity are correlated with increases in dependence, not only on medical services but on home care and related custodial services. 

Which leads me to the first of the only two practical ideas that occur to me for slowing the increase in entitlement expenditures relative to the size of the economy: a shift in emphasis in medical research from length of life to ability to live independently. Independent living means living without home care (whether by relatives, thus taking time from them that they could use more productively in other activities, including paid employment, or by paid care—paid by the government in many cases) and being able—and wanting—to work. Independent living can be fostered by focusing medical research on problems of vision, musculoskeletal problems (which impair mobility), obesity, and dementia, in preference to research on curing and preventing cancer, heart disease, and stroke. 

My second proposal is to means-test social security and Medicare. About 7 percent of American households have incomes above $150,000. Most of these people are not wealthy (even people with incomes of $250,000, which places them in the top 1.5 percent of the household income distribution, are not wealthy by modern standards), but they are comfortable. They can afford to finance their retirement through savings, and to buy decent health insurance. In my opinion they should not be eligible to receive either social security or Medicare benefits. Taking them off the social security and Medicare rolls would produce an immediate substantial savings in federal entitlements expenditures.

Comments

[Jjj Jjj]

So this is just a ruse to kill off the republican base faster - they are less educated and older,after that taxes up.

On a serious note,this defeatist attitude is counterproductive.You don't really consider more income or cutting other spending and that's absurd especially given the topic.

[Ed Rector]

The USA has its own currency. There is no danger whatsoever of 'long term (in}solvency'. Judge Posner should know better.

Actually, he probably does know better; but those U. Chicago economists he has lunch with have gotten into his head.

[jim kirby]

It must be that a lot of folks who earn $150,000 and beyond have very little earned income, so that the proposal to deny them SS and Medicare benefits based in income would depend on considering unearned income as well.

And a guy like Warren Buffet could avoid all earned and unearned income by living off loans secured by his wealth, having no income at all and thus qualifying for full SS and Medicare benefits until the day he dies.

What a country!

[plus.google.com/106583969355306985514]

Your means testing idea isn't really well thought out. Several important considerations remain about your proposal of a maximum income needed in order to qualify for future benefits: 1) if a person's earnings exceed your threshold only one working year, are they ineligible to receive any 'entitlements' in their retirement? 2) are people who've been paying into SS and have been budgeting that they would be collecting a certain amount of retirement income from SS, going to have their safety-net suddenly removed? What if they are close to retirement? At what age would you draw the line of unfairness?

[Terry Bennett]

The primary problem we face is cultural. We have positioned the government as an enabler. Social Security and Medicare are set up as contracts between the government and individuals. You pay into the plan, and you get a return - in fact a ridiculously generous return out of all proportion to your contribution. These programs should have been acknowledged from the start as taxes to fund welfare, with means tested payouts, but the socialists whose initials are so well known to us refused to degrade the self-esteem of their constituents in this way, preferring to prop up this national illusion that nobody really falls short and everyone is "entitled".

A new client intimated to me this week that she had nothing in her name - no car, no house, no bank account - even though she was obviously comfortable. When I asked if perhaps she might be concerned with avoiding creditors, she bristled at the perceived aspersion. Eventually she volunteered that she wanted to be sure Medicaid didn't rob her of her wealth at the end of her life. I'm sure she wouldn't dream of buying a product or service and not paying for it, but she doesn't see her strategy as dishonest in the least. It's what the government has taught us to do.

There is some basic arithmetic at work here. If you are going to consume some number of dollars of goods and services over your lifetime, then you ought to figure on producing at least that much (plus a little more to cover your charity toward those who fall a bit short, charitably collected by our IRS). That's why we have even money in the first place: it's a means of accountability. Under communism, there's no need for money - everybody is entitled to take what they need, whether their production warrants it or not. (Good luck with that.)

If you're 90 and you go in a nursing home and you've got $500k saved up, then you can quite well afford to pay your own way and if your kids want to preserve their inheritance they can take care of you themselves. It used to be a point of pride that we paid our bills. In a lyric from about 100 years ago, the St. James Infirmary Blues, a dying man requests, "Put a twenty-dollar gold piece on my watch chain, so my friends will know I died standing pat." Nowadays, people think why should I rob my own children when I can rob everybody's children? We need first to re-establish the opinion that each of us should pay our way, and then to expose this ridiculous notion that we ARE paying our way.

[Fastspinecho]

Another possibility is to raise taxes. I'm not sure why Posner seems to have ruled this out. It is certainly not harder, politically, than altering entitlement programs.

Some may raise concerns that increased taxes would significantly distort the economy, but I doubt that would be true. Social Security is a transfer payment, so it should make little overall difference to the economy whether the budget is balanced by decreasing the consumption of workers (i.e. raising taxes) or decreasing the consumption of retirees (i.e. cutting benefits).

Likewise, shifting health care expenses to the "comfortable" elderly from taxpayers is unlikely to change their pattern of health care consumption - and if it did, then the decision would warrant even more scrutiny.

[Thomas Rekdal]

I could not agree more with Terry Bennett's comment that our problem is primarily cultural. (I would prefer to call it moral, but that is a minor quibble.) Something fundamental shifted in the 1930s, not merely here but in most of the democratic world. We no longer hold public debt or individual expectations of public support in the same disdain.

I am inclined to think that the change is irreversible. We can all think of measures that might stave off disaster--Judge Posner has suggested them from time to time, means-testing being the most obvious--but none of them are politically feasible.

The most likely outcome is some sort of inter-generational warfare. How long can people under 40 remain content with a working life dedicated to the support of old people? I have no idea.

[Neilehat]

Tough problem, balancing the books while maintaining the Social Contract. All Societies must and shall be judged by their Social Utility, which are the goods and services that they provide. In this case, care for the Indigent, Infirm and the Elderly. Perhaps the solution is to return to the requirements of the recent past among N.A. Indian Tribes that required the elderly and infirm to disappear into the Widerness to die friendless and alone, lest they become a burden on the Society. Or in Sparta where the infirm were exposed at birth by the "Health Committee" - lest they grow and develop into burdens on the State.

Problems solved, but I doubt that these are solutions to "balancing the books" we would be willing to accept. And so... and don't tell me that "Contract is Dead"...

[B Wilds]

I predict a third proposal will slowly be looked at and considered. Most people would prefer to live a long life, but not too long. There is nothing wrong with a dignified death after a long life. The mores of America are rapidly changing according to those who only a decade ago thought that gay marriage and gays in the military would never become accepted. Sadly ideas like euthanasia and even discrete breastfeeding in public still drives many Americans crazy. With people living longer and technologies ability to extend a persons life well beyond where they feel it has any "real quality" the issue of euthanasia will not go away. Below is a recently written post about this subject.

http://brucewilds.blogspot.com/2013/12/dignified-death-after-long-life.html

[Jack]

One possibility is that of the new attention to rising H/C costs will result in market or regulatory driven efficiencies that constrain the predicted 3% of GDP increase.

On the other hand (economists must have at least two) suppose Medicare and H/C does take a higher percentage of GDP. H/C seems unavoidably a labor intensive industry ------- so! more jobs migrate to the H/C sector. When H/C was a small percentage of GDP, farming, auto and other mfg took a much larger percentage of GDP.

Today's mfg, agriculture and service sectors have become so efficient (with considerable help from other nations) that we seem to have a structural unemployment problem. (How long can "jobless recoveries" last w/o concluding "it's the new normal?"

We'll surely become yet more efficient in all of our sectors but with the labor intensive areas of H/C, teaching, and, of course, lawyering and judging requiring a higher percentage of our labor force.

Posner's last paragraph makes sense, but already SS benefits are taxed away for those with high EARNED income. "Funny thing" that we give more breaks to those with un-earned incomes.