In recent weeks, we have heard much talk about the need for fiscal responsibility. The president’s budget projects a deficit of $1.75 trillion this year, Congress passed a $787 billion economic recovery plan and President Obama convened a White House summit on fiscal responsibility.
Of course, we must be concerned with long-term fiscal stability, but we cannot allow fiscal responsibility to be used as a pretext for cutting the social safety net. In this time of growing economic insecurity, we should be strengthening rather than dismantling the social safety net.
A misdiagnosis of our budget problems can too easily lead to prescriptions that are worse than the disease. First, we should distinguish long-term structural deficits from the short-term deficits that result from temporary stimulus spending. Deficit spending in the short term is absolutely necessary to resuscitate an economy that is spiraling downward. If anything, the economic recovery package enacted in February is too small to fill the yawning gap between what our economy can produce and what it can sell. [i] We know that premature fiscal tightening can choke off a budding economic recovery. We cannot let concerns over budget deficits keep us from doing what is necessary right now to rescue the economy.
And even as we turn our attention to long-term structural deficits, we must be careful to distinguish unsustainable long-term health care costs—both public and private—from the financing of Social Security, which is fundamentally sound.
As Henry Aaron and other respected economists have pointed out, there is no “entitlements crisis.” There is not even an “entitlements problem.” There is a long-term budget problem caused by the unsustainable growth of health care costs. [ii] Indeed, the CBO projects that if nothing were done to slow the growth in health care costs overall, we would be spending 49% of GDP on health care by 2082.
There is no practical way to control public health care costs without addressing private health care costs as well. Both private and public health care are delivered largely by the same providers, using the same drugs, the same treatments and the same procedures. Private and public health care spending have been rising at the same rate for the past 30 years and are likely to continue doing so.
Accordingly, the price of admission to the debate over long-term fiscal responsibility is support for comprehensive health care reform. To fix our long-term structural deficits, we have to fix Medicare and Medicaid, and to fix Medicare and Medicaid, we have to control health care costs in the private sector.
For more than three decades, pundits have been telling us we need more competition in our health care system. But instead of true competition, what we have today is a fragmented system marked by cost shifting and price distortions because 45 million people have no coverage and those with coverage too often receive inappropriate or poor quality care.
Costs are out of control because the amount and type of care is determined largely by the supply of services available. Hospitals and physicians “compete” for business by offering patients newer and costlier technology. As a result, we spend $2.2 trillion on health care annually—a frightening sum that overwhelms both private and public insurance plans and pushes needed care further and further beyond the reach of working families, even as appropriate care is delivered no more than half the time.
We can and must do better. We must restructure our health care system to achieve better quality and better value, and we can start with the following:
- Measure and report on the quality of care, the comparative effectiveness of drugs and procedures and what medical science shows to be best practices;
- Put technology in place to automate health care data; and
- Reform the way we pay for care so doctors have the information, tools and financial incentives to continuously improve care for their patients.
The recent economic recovery package, with its substantial investment in health information technology (HIT) and research on the comparative effectiveness of drugs and medical devices, marks an historic first step in the right direction. And the president’s budget makes an important down payment on comprehensive health care reform over the next decade. But further investments in these areas are required, as well as additional upfront investments to achieve universal coverage.
The success of Medicare and Medicaid makes the case for an upfront investment to establish a public health insurance option. Medicare and Medicaid have proved to be more cost-effective than private-sector health care coverage, even though both programs serve less healthy populations with higher rates of disability. The administrative overhead of Medicare is about 2 percent of total cost, while the administrative costs of group coverage in the private sector average 12 percent. Economic simulations show that if the Medicaid population were put into private plans, private insurance would cost significantly more.
The initial investments necessary to fix our health care system may increase the deficit in the short term, and the cost savings from these investments may be realized only beyond a 10-year budget window. But the cost of doing nothing far outweighs the cost of immediate, comprehensive reform.
The AFL-CIO is committed to working with the president and Congress to enact health care reform quickly—not only to address our long-term fiscal problems but also to help working families make ends meet and to make U.S. businesses more competitive. According to the New America Foundation, U.S. manufacturers are paying more than twice as much for health benefits as most of their foreign competitors. [iii] In short, fixing our health care system is a key part of fixing our economy.
After reforming our health care system, we should take up the challenge of strengthening Social Security.
Social Security is the only reliable and guaranteed retirement benefit for millions of Americans. The current economic crisis and the resulting dramatic decline in individual retirement savings, combined with the disappearance of defined-benefit pension plans, are powerful reminders of the importance of Social Security.
Even before this recession, half of all American families—and nearly two in five families closest to retirement—had no retirement savings whatsoever. Of the near-retirement families with some retirement savings, half had savings of less than $83,000—enough for a monthly retirement income at age 65 of only several hundred dollars. If the economy does not improve significantly, more than six in 10 workers 45 or older say they will need to delay retirement.
These are all reasons to strengthen retirement security through Social Security and private pensions. Under no circumstances should we be considering proposals to undermine retirement security through benefit cuts.
As President Obama has said consistently, the finances of Social Security are essentially sound and will remain in balance far into the future with only modest adjustments. Social Security revenues and reserves are fully adequate to pay all benefits due until 2041 or 2049, and 74 percent of benefits thereafter. To put this shortfall into perspective, the cost of making the Bush tax cuts permanent is three-and-a-half times the size of the entire Social Security shortfall over 75 years. The cost of extending the Bush tax cuts for only the wealthiest 1 percent still exceeds the entire Social Security shortfall.
Making adjustments on this order is nothing new. Throughout Social Security’s 75-year history, the program has been modified many times to keep pace with economic changes. Social Security’s long-term solvency could be addressed, for example, by raising the taxable earnings cap (currently set at $106,800) to cover 90 percent of earnings, and/or dedicating estate tax revenues above a certain limit to the Social Security Trust Fund.
Reforming our health care system and strengthening Social Security are the responsibilities of Congress, which must not abdicate these responsibilities by delegating them to an entitlements commission or a Social Security task force.
The not-so-secret agenda of those who advocate for an entitlement commission is to institute a spending cap on entitlements, which would result in arbitrary cuts in Medicare and Medicaid benefits. Arbitrary benefit cuts would have little impact on the root causes of uncontrolled growth in health care spending. But they would shift the burden of deficit reduction to some of the neediest members of our society, running counter to the core function of these programs—to ensure access to standard health care for the elderly, poor and people with disabilities.
An “entitlements commission” might also recommend cuts to Social Security benefits, even though financing for the program is on a sound footing. The AFL-CIO is opposed to benefit cuts, such as increasing either the early retirement age or the normal retirement age beyond current law; changing the Social Security benefit formula to increase the number of years of earnings counted or to index benefits to prices instead of wages; or restricting eligibility.
“Fixing” Social Security by lowering living standards is no solution at all. One reason for the modest shortfall in Social Security’s long-term finances is that payroll contributions have been slowed by wage stagnation. The most appropriate response to this problem is to encourage wage growth by allowing workers to form unions free of employer interference and to reform health care so that health care expenditures are no longer a drain on wage growth. The answer is not to increase retirement insecurity by threatening Social Security benefit cuts.
We cannot allow scare-mongering about a phony “entitlements crisis” to stand in the way of real progress. Instead of paring back the already tattered social safety net, we should be repairing it. Instead of withdrawing social insurance from the elderly, we should be extending social insurance to the young. America's workers deserve no less.
[i] Paul Krugman, “The Obama Gap,” The International Herald Tribune (Jan. 9, 2009).
[ii] Henry Aaron, “A Vision for the U.S. Pension System at 100,” NASI Annual Meeting (Jan. 29, 2009).
[iii] Len Nichols and Ellen-Marie Axeen, “Employer Health Costs in a Global Economy: A Competitive Disadvantage for US Firms,” New American Foundation (May 2008).