Democrats Face Crucial Choice on Entitlement Reform

Time is running out to preserve the American social safety net programs.

Even if Democrats hold on to the presidency and their Senate majority in November’s election, it is almost inevitable that they will have to do entitlement reform with Republicans in Congress. Time is running out to preserve the social safety net programs which, even more so in the last four years, tens of millions of American have come to depend on.

Forty-six million senior Americans are currently on Medicare. More than fifty million are on Medicaid, which finances health care for the poor. Fifty-two million receive Social Security benefits. Five million receive Supplemental Security Income. Seven million receive unemployment insurance. Nearly 47 million are on food stamps or benefit from other nutrition programs.

In 2010, these entitlements accounted for $2.1 trillion of federal spending or 66 percent of the budget. Spending on unemployment benefits and food stamps will likely come down as the economy recovers. For comparison, four years ago, before Barack Obama became president, 32 million were on food stamps. But the costs of the three largest entitlement programs are expected to continue to increase, largely as a result of changing demographics.

Medicare spending is projected to increase by $300 billion over the next ten years before the fund falls into deficit in 2024. Once the main trust fund is depleted, revenues from Medicare taxes will initially be enough to cover 90 percent of expenses but that share will decline to 75 percent by midcentury, then rise to 88 percent by 2085.

Medicare’s trustees estimate a total worth of unfunded obligations of $24.6 trillion over the next 75 years.

In reality the program, unless reformed, will be more heavily indebted as the official projections assume $575 billion in savings included in President Barack Obama’s health reform law and a 29 percent reduction in physician reimbursements in 2012 which is highly unlikely to happen.

Without the president’s aforementioned cuts to Medicare providers, the program could have posted a deficit as early as 2018. He believes that an additional $100 billion in savings over the next ten years can be identified by the Independent Payment Advisory Board that was created under Obamacare. Republicans point out that this amounts to health-care rationing and will do little to restrain rising costs in the long term.

Medicaid, too, will run out of money soon. Costs have increased from nearly $74 billion in 1990 to more than $427 billion last year. It is projected to spend $434 billion more over the coming decade and the president’s health-care reform law has put twenty million more Americans on Medicaid, making it very difficult for the states, which have to pay for those extra people after 2016, to continue to finance education, infrastructure and police services besides. Already, Medicaid is often states’ single largest budget item. The only way to continue to finance it is either to slash other spending commitments or raise taxes.

The Social Security trust fund is projected to last until 2036. Once it is depleted, the annual payroll taxes that pay for the program will only be sufficient to cover 75 percent of the retirement benefits that it is required to pay seniors.

In 2010, Social Security spent $49 billion more in benefits that it took in in taxes. Last year, the deficit was just a few billion dollars less. Between now and 2085, the pension program’s trustees estimate a $9.1 trillion deficit.

Some Republicans favor private savings accounts as an alternative to Social Security but former president George W. Bush’s privatization push won precious little support even among members of his own party. Democrats were unanimously opposed to it. Indeed, they deny there is even a problem.

President Barack Obama, in his first election debate with Republican Mitt Romney earlier this month, insisted, “Social Security is structurally sound.” Senate leader Harry Reid told NBC’s Meet the Press in January of last year that the program is “not in crisis. This is something that’s perpetuated by people who don’t like government,” he said. “Social Security is fine.”

Republicans now focus on reforming Medicaid and Medicare.

In his alternative budget proposal for the fiscal year 2012, Wisconsin congressman Paul Ryan, now presidential candidate Mitt Romney’s running mate, included the gradual privatization of Medicare. His plan excluded Americans over the age of 55 but would provide “premium support” to future retirees; a subsidy or voucher with which to buy private insurance.

Ryan’s plan was vehemently criticized by Democrats who claimed that it threatened the “dignity” of seniors and would leave them, as President Obama put it, “at the mercy of the insurance industry.”

Ryan amended his plan a year later. In his budget proposal for the fiscal year 2013, he preserved traditional Medicare as an option while linking premium support to the second cheapest private insurance plan so seniors would always have at least two plans to choose from.

Even the watered down version of Ryan’s privatization plan is likely to reduce costs. The Congressional Budget Office in 2006 found (PDF) that private insurers and competition could do Medicare more cheaply than the government program. A study by Michael E. Chernew, David M. Cutler and Zirui Song published in The Journal of the American Medical Association in August of this year reached a similar conclusion. They compared the costs of traditional Medicare with Medicare Advantage, a program that allows seniors to buy private insurance, and found that between 2006 and 2009, under Medicare Advantage, the second lowest bidder cost 9 percent less than traditional Medicare. If Ryan’s plan had been in effect then, seniors would have had to pay an average of $64 per month extra to stay in traditional Medicare or could have saved the money by buying private insurance.

The Republican plan for Medicaid is less ambitious. In both Ryan’s budget proposals, which were passed in the House of Representatives but not the Senate, Republicans block granted Medicaid payments to state governments to enable them to rein in costs however they see fit. Several Republican governors have asked for exactly that. Democrats oppose the measure because it would likely reduce Medicaid spending in conservative states.

There is no question that neither of the three major entitlement programs will be available in their present forms to future generations of Americans. There simply won’t be the money to pay for them. Conservatives have put out several plans in recent years to preserve the programs in one form or another. Democrats will have to decide soon if they can live with a social safety net that is less extended or continue to resist change and hope for the best.