February 21, 2023
Guess so since it gave Brian Riedl, a senior fellow at the Manhattan Institute, plenty of space to say things that are extremely deceptive, if not outright lies. The gist of Riedl’s piece is that it will not be possible to sustain Social Security and Medicare without tax increases on the middle class.
Much of the piece is the standard line about an aging population posing an impossible burden that we have been reading about in the NYT and elsewhere for many decades. For example, Riedl includes an old favorite:
The ratio of workers supporting each retiree, which was about 5:1 back in 1960, will fall to just over 2:1 by the next decade.
This is, of course, largely true. The deceptive part is that most of the decline in the ratio of workers to retirees took place long ago. The ratio of covered workers to beneficiaries had dropped to 3.2:1 by 1975. It hovered around this level until the baby boomers began to retire at the end of the first decade of the century.
The ratio of workers to retirees is now down to 2.8 to 1. It is projected to fall to 2.4 to 1 by the next decade. Are you scared yet?
Riedl also tells us, “people who live until age 90, a fast-growing group, will spend one-third of their adult life collecting Social Security and Medicare benefits.” There are two problems with this assertion.
First, the people who live to 90 will be disproportionately higher-income workers. Many will have delayed collecting Social Security benefits until they are age 70, or close to it. Also, if they continue working and have employer-provided health insurance, Medicare will not be the primary payer until they retire. If “adult life” starts at age 18, then we are looking at people who live to age 90 collecting benefits for a bit more than a quarter of their adult life (20 years out of 72 years).
But the more important point is that life expectancies have not increased for everyone. As a recent report from the Congressional Research Service documented, there has been almost no increase in life expectancy at age 65 for workers in the bottom half of the income distribution. The story of increasing life expectancies is overwhelming, a story of higher income workers living longer.
Getting Beyond Deception
Riedl also tells us that “today’s typical retiring couple will receive Medicare benefits three times as large as their lifetime contributions to the system.” This is true, but it leaves out two important points.
First, the reason that the value of Medicare benefits is so high is that we pay twice as much for our health care, per person, as people in other wealthy countries. This is not due to better care. People in the United States do not do better by most outcome measures.
Our higher costs are the result of the fact that we pay twice as much for everything. We pay the drug companies twice as much for prescription drugs. We pay the medical equipment manufacturers twice as much for medical equipment. We pay our doctors twice as much as doctors in Europe and Canada. And, we throw hundreds of billions annually at insurance companies because they have powerful lobbyists who can get them these handouts. Our expensive Medicare benefits are not a story of the elderly living the high life, they are a story of powerful interest groups ripping off the healthcare system.
But these are just the standard deceptions we have come to expect since the days when private equity billionaire Peter Peterson was leading the charge against Social Security and Medicare. But the other problem with Reidl’s Medicare comment gets to the outright lie part.
Unlike Social Security, Medicare is not designed as a system where a dedicated tax is supposed to fully fund the program. Traditional Medicare has three parts: Part A is the hospital insurance portion of the program, which is supposed to be paid from the dedicated Medicare tax. Part B covers doctors’ payments. This is only designed to be partially funded by premiums paid by beneficiaries. Part D is for drug coverage, which is also designed to be only partially funded by beneficiary premiums. (There is also Part C, Medicare Advantage, which is intended as a way to funnel money to insurance companies.)
Since much of the Medicare program is not even designed to be covered by payments directly to the program, it makes no sense to include these portions of the program in complaints about Medicare’s deficit. When Riedl tells us that Medicare is projected to run a $48 trillion shortfall over the next three decades, the overwhelming majority of this projected shortfall is due to a portion of the program that is not covered by Medicare-specific taxes by design.
It is comparable to telling us that the Defense Department is running an $890 billion deficit this year (3.4 percent of GDP), because that is the extent to which its spending will exceed its designated taxes. I assume that the NYT would not allow the piece complaining about the huge Defense Department deficit on its opinion page because it makes no sense. Why is this complaint about the Medicare deficit allowed?
There actually is a very interesting story about the projected deficit for the Medicare Part A program: it has fallen sharply in recent decades. In 2000, it was projected that Medicare would face a shortfall of 0.4 percent of GDP (around $90 billion a year) by now, rising to 1.0 percent of GDP by 2040 (Table III.C1). The most recent Trustees Report shows a shortfall of just 0.04 percent of GDP this year, rising to 0.42 percent in 2040 and then falling through the rest of the century.
This improvement in the program’s finances is due to the sharp slowing of healthcare cost growth. Needless to say, if we got our health care costs in line with costs in countries like Germany and Canada, the program would be showing an enormous surplus. The Affordable Care Act played a role in curbing healthcare cost growth over this period. President Biden is trying to go further with his proposals to limit drug costs if Republican “deficit hawks” don’t stand in his way.
Do We Have to Tax the Middle Class?
There are two further points work making on Reidl’s piece. First, there is an issue that Social Security will soon need additional revenue beyond what is projected to come from its designated payroll tax. This can come, at least in part, from raising taxes on higher-income earners. The tax is not collected on wage income above $160k.
When this cutoff was set in 1982, only 10 percent of wage income was above the cap. As a result of the upward redistribution of income over the last four decades, close to 18 percent of wage income is above this cutoff. Subjecting a larger portion of the wages of high-income earners to the tax would help to close the projected shortfall.
We could also turn to other taxes, such as taxes on non-wage income or higher corporate income taxes. This would move away from the practice of funding benefits from the dedicated Social Security tax, but it’s not clear many people would be bothered by this shift.
It is also worth noting that in prior decades we did raise the Social Security tax rate repeatedly. The Social Security tax was increased over the five decades following its inception, from 2.0 percent in 1937 to 12.4 percent in 1990. It has not increased at all in more than 30 years.
As I noted yesterday, it was possible politically to increase taxes so much in part because, at least through the first thirty-five years of the program’s existence, real wages were rising at a healthy pace. Taxing away a portion of the wage gains workers receive every year is an easier matter than asking workers to give up a portion of paychecks that are stagnant or even declining in real terms.
It appears that real wages are back on an upward path. Beginning in the middle of the last decade, real wages were rising at a rate of close to 1.0 percent annually for the typical worker. Pandemic inflation briefly stopped this growth, but it appears that real wages are again rising, especially for those in the bottom portion of the wage ladder. If this trend continues, modest increases in Social Security taxes should be a possibility if that proves necessary.
The other issue is that we may not need additional taxes at all, at least from a macroeconomic standpoint. Many economists, most notably former Treasury Secretary Larry Summers, have argued that the biggest problem facing an aging society is “secular stagnation.” This is a story where there is not enough demand to keep the economy operating at its potential and to keep workers fully employed. This is 180 degrees at odds with the story that we won’t have the resources needed to support a growing elderly population. If Summers’ secular stagnation view proves correct, then there would be no reason to have tax increases since the economy is suffering from too little demand, not too much.
In short, the fear lobby is up to its old tricks, which genuinely serious people (as opposed to “very serious people”) have been combatting for decades. Social Security and Medicare are great success stories that tens of millions of people depend upon. We should not allow dishonest scare stories to be a basis for slashing and/or privatizing these programs.