I am a candidate in the May 15 Nebraska Republican Primary for U.S. Senate, against the incumbent Deb Fischer because she is totally ignoring our enormous and out-of-control national debt. In fact she has just recently voted twice to make it worse than it already is.
The major driver of our debt is the entitlement programs, Social Security, Medicare and Medicaid. Social Security is self-funded from the payroll tax and can be shored up long term with some relatively simple adjustments such as raising the income cap on which the payroll tax is levied and/or SLOWLY raising the eligibility age for full benefits. Medicaid costs can be controlled by block-granting it to the states with a fixed contribution from the federal government.
But Medicare will be much harder to reform because it is the most expensive entitlement program of all. The above chart shows that a couple with average wages reaching age 65 in 2015 can expect to receive Medicare benefits that exceed what they put in by $357,000. This subsidy will only increase in the years ahead.
The American Enterprise Institute’s James Capretta has recently described one possible way to get Medicare costs under control. In outline:
Combine hospitalization (Part A), outpatient services (Part B) and drugs (Part D) into a single combined insurance product.
Offer community-rated premiums for beneficiaries, meaning that premiums would not depend on age or health status.
A small, universal entitlement benefit would be paid to all enrollees set to cover about 20% of today’s benefit and equal to about $2600. The Medicare payroll tax of 2.9% would pay for this universal benefit.
Additional financial support would be based on lifetime earnings, with the lowest quartile receiving substantial additional support which would be phased out for middle- and upper-middle class retirees.
Retirees would purchase private insurance plans which could be in the form of high-deductible catastrophic insurance combined with health savings accounts.
Conclusion. “The reform of Medicare outlined above is a plan to substitute higher premiums from the middle and upper classes for the large general-fund subsidies taxpayers now provide to Medicare to finance the majority of Part B and Part D costs. The end goal is a self-financing Medicare program.”
In 2012 I was a candidate in the Republican Primary for U.S. Congress, Nebraska District 2. My platform at that time was to “Eliminate the Deficit.” Today I am about to enter the 2018 Nebraska Republican Primary for the U.S. Senate. My platform will be to “Fix the Debt.” (http://www.fixthedebt.org/)
Our current debt ($15 trillion for the public part on which we pay interest) is now 77% of GDP, the highest since right after WWII, and steadily getting worse. At the present time it is essentially “free” money because interest rates are so low. But that is already starting to change. Every 1% increase in interest rates will increase interest payments by $150 billion per year. A huge upsurge in inflation (which can happen at any time), followed by a corresponding rise in interest rates, will become a huge drain on the federal budget and likely lead to a new crisis much worse than the Financial Crisis of 2008.
With healthcare spending, both public and private, now almost 18% of GDP, and growing rapidly, there is really only one practical way of getting our national debt under control: stabilize the cost of healthcare in the U.S.
Consider the following data:
Our national health expenditure grew 4.3% (much faster than inflation) to $3.3 trillion in 2016, $10,348 per person, and accounted for $17.9% of GDP.
National health spending is projected to grow at an average rate of 5.6% for 2016 – 2015, and reach 19.9% of GDP by 2025.
FederalMedicare Outlays were $588 billion in 2016 or 15% of federal outlays.
Federal Medicaid outlays were about $390 billion in 2016 or 10% of federal outlays.
The federal tax exclusion for employer provided health insurance was $250 billion in 2016.
Summary: the federal government spent almost $1.23 trillion on healthcare in 2016, over 30% of all federal spending of $3.9 trillion.
Conclusion. The only practical way to get our nation’s debt under control is to limit the growth of healthcare spending. Right now federal spending on healthcare is defined benefit (i.e. open ended). We simply must move to a defined contribution system where all of us as healthcare consumers assume responsibility for our own healthcare spending. Detailed proposal forthcoming!
Congress has just postponed the debt ceiling until December 8 but at least they didn’t repeal it. It is crucial to retain regular and explicit debt ceilings as a reminder of the urgency of putting our debt on a downward course (as a percentage of GDP).
As a reminder:
The debt now stands at 77% of GDP (for the public part on which we pay interest), the highest it has been since right after WWII. The $15 trillion public debt right now is essentially “free” money because interest rates are so low. But interest rates will inevitably return to more normal, and higher, historical levels and, when this happens, interest payments on the debt will skyrocket.
The entitlementprograms of Social Security. Medicare and Medicaid are the drivers of our debt problem because their costs are increasing so rapidly. Medicaid costs the federal government almost $400 billion per year. Medicare costs the federal government $400 billion per year more than it receives in FICA taxes and premiums paid.
The attached chart demonstrates the scope and urgency of the problem. By 2032, just fifteen years from now, all federal tax revenues will be required to pay for Social Security, Medicare, Medicaid and interest payments on the debt. This means that all of ordinary discretionary spending: on defense, various government operations and social welfare programs will be paid for entirely from new deficit spending and, in the process, will almost inevitably suffer huge cutbacks. The lower-income and poor people, who are the most reliant on government programs to get by, will be the most adversely affected.
Conclusion. Such a dreary scenario of drastically tightened government spending does not have to occur. It can be avoided by immediately starting to make sensible curtailments, not actual spending cuts, all along the line. Do our national leaders have the common sense and fortitude to do this?
The readers of this blog know that my favorite topic is our very large national debt, now 77% of GDP (for the public part on which we pay interest) and predicted by the Congressional Budget Office to keep steadily getting worse, without major changes in current policy.
It is also well documented (see chart) that our entitlement programs of Social Security, Medicare and Medicaid are the drivers of the huge annual budget deficits which make the accumulated debt so much worse and worse.
The economist John Cogan has an informative interview in yesterday’s Wall Street Journal explaining why entitlement spending is so difficult to control. First of all, according to Mr. Cogan, only three modern presidents have made any effort to control entitlement spending:
FDR who persuaded Congress to repeal unjustified disability entitlements to 400,000 WWI, Philippine War and Boxer Rebellion veterans.
Ronald Reagan “slowed the growth of entitlements like no other president ever had.”
Bill Clinton’s welfare-reform plan not only reduced welfare’s burden on taxpayers but also benefitted the recipients, whom the old program had been harming.
Mr. Cogan identified three necessary political conditions for any entitlement reform. They are:
Presidential leadership “without which there has never been a significant reduction in an entitlement.”
Significant agreement among the general public and the elected representatives that there’s a problem.
Bipartisan consensus on the solution for correcting the problem.
Conclusion. Think about it. This is a quite a gloomy assessment. Nothing will get done on the primary reason for our huge debt problem without both presidential leadership and bipartisan political support. When is this going to happen?
This blog is devoted to fiscal and economic issues facing the U.S. Both the Trump Administration and the Democrats are working to speed up economic growth and I believe there is a good chance that this will happen.
However there is not nearly enough interest in addressing an even bigger problem: our national debt, is now larger, in relative terms, than at any time since the end of WWII.
This is a very difficult political problem because elected representatives would much rather say yes than say no to new programs and more spending. It is even more difficult to try to restrain the growth of, let alone cut, existing programs.
The Congressional Budget Office has recently published a long list of possible ways to decrease federal spending (or increase federal revenues) over the next ten years. It is interesting to pull out several of these suggestions to see what can be accomplished:
Program 10 year savings
Eliminate concurrent receipt of retirement pay and disability $139 billion for veterans.
Use an alternative measure of inflation to index mandatory $182 billion
Reduce funding for International Affairs Programs. $117 billion
Limit highway funding to expected highway revenues. $40 billion
Reduce the size of the federal workforce through attrition $50 billion
Reduce funding for grants to state and local governments $56 billion
Impose caps on federal spending for Medicaid $680 billion
Increase premiums for Medicare Parts B and D from 25% to $331 billion 35% of cost. Total $1595 billion
Conclusion. This brief list of budget restraints would reduce deficit spending by about $160 billion per year. This is significant but not nearly enough compared to the projected deficit of $685 billion for just the 2017 fiscal year alone. About 2/3 of the savings come from the two entitlement programs of Medicare and Medicaid. The idea here is to give specific examples of the sort of changes which will be necessary to seriously confront our debt problem.
Now that the Republicans have failed to replace the Affordable Care Act with a poor substitute, it is likely that a bipartisan plan will emerge. Both sides want changes in the existing structure of the ACA. The Democrats want to hold down the rapidly growing costs for individuals who purchase insurance through the exchanges. The Republicans want to hold down the overall cost of American healthcare which now exceeds 18% of GDP.
There should be plenty of room for compromise:
Medicaid. The Centers for Medicare and Medicaid Services project that under the House bill, which caps federal spending growth for Medicaid and saves hundreds of billions of dollars, total Medicaid enrollment will stay roughly constant above 70 million for the next decade, compared to 55 million before the ACA was enacted.
A Bipartisan Problem Solvers Caucus would fund cost-sharing payments to insurers, proposes curtailing the mandate on employers to provide health insurance to their workers, advances states’ ability to band together into regional compacts for selling insurance across state lines, and expands the opportunity for states to experiment with different ways of providing coverage.
Medicare. Just letting Medicare negotiate for drug prices and reducing the variation in the costs for post-acute care would provide huge savings, without even addressing inefficiencies in Medicare’s basic design.
Conclusion. The above plan holds down the cost of insurance purchased by individuals on the exchanges as well as taking significant steps to control the costs of both Medicare and Medicaid. It doesn’t address the huge inefficiency of employer provided care but nevertheless represents a big step forward towards implementing cost control in healthcare.
The Affordable Care Act was passed by a Democratic Congress in 2010 with no Republican support. It expands access to healthcare but does nothing to control costs which have now reached 18% of GDP and climbing.
The current Republican Senate bill to replace the ACA does attempt to control costs but is unable to attract enough support to pass.
The problem is to achieve both broad access and much lower costs at the same time. In general, Democrats prefer a single payer system while Republicans want to retain a free market approach. So compromise will be required.
The tax exemption for employer provided health insurance should be replaced by a universal (and refundable) tax credit for all limited to the cost of catastrophic health insurance (with a high deductible). This will preserve expanded access as well as requiring everyone to pay attention to costs.
Tax preferred health savings accounts for routine healthcare expenses should be authorized and further subsidized for low-income families through the ACA exchanges.
Medicaid (for poverty-level families) should be put on a fixed federal budget to control runaway costs. States should be given much greater flexibility to direct resources to those with the greatest needs.
Redesign of Medicare. Medicare is currently being subsidized by the federal government (after FICA taxes and premiums paid) at over $400 billion per year. Introducing a defined contribution element into this single payer program will help to hold down costs.
Pre-existing Conditions can be covered with suitable enrollment windows and state-run high-risk pools.
Conclusion. The ACA has achieved nearly universal access to healthcare in the U.S. But costs continue to rise sharply. A universal tax credit combined with health savings accounts for the private market combined with a defined contribution single payer Medicare system has a good chance of getting overall healthcare costs under much better control.
I know that I repeat myself a lot. I am a fiscal conservative and social moderate. This puts me in the middle of the political spectrum from left to right. I support social welfare programs if they are legitimately helping the less fortunate among us. I am especially supportive of programs for African-Americans because of the racial bias they experience.
Unfortunately our national leaders have collectively lost a sense of fiscal responsibility in recent years. Looking at the standard debt chart (above) produced by the Congressional Budget Office, it is clear that indifference to debt commenced under President Reagan and has waxed and waned ever since. The debt has been growing especially fast ever since the Great Recession in 2008 and now stands at 77% of GDP, the highest since the end of WWII. Shrinking the debt (as a percentage of GDP) is now America’s most urgent problem.
As I have discussed before, it is the entitlement programs of Social Security, Medicare and Medicaid, as well as interest payments on our increasing debt which will continue to worsen the debt problem in the coming years without strong corrective action.
All entitlement programs need to be reformed to impose cost control. Right now the two healthcare bills in Congress propose that the funding mechanism for Medicaid be changed so that it will be on a fixed (federal) budget from now on, rather than be continued in its current open-ended form.
Medicare is an even more expensive program than Medicaid. It would be better to fix both of these programs at the same time, but it is better to fix Medicaid alone than to do nothing at all.
It would be even better to replace our employer provided healthcare system with a uniform, but limited, health insurance tax credit for all (including for the self-employed) and to make all of these major changes at the same time. This would be the fairest way to proceed.
Conclusion. The current GOP plan to curtail healthcare costs could be much improved. It is only a small step in the right direction.
As the presidential election tightens and the likely margin of victory for either candidate continues to shrink, it becomes ever more apparent that we need a bipartisan approach to solving our most basic problems. My last post discusses the need for fundamental tax reform to get our economy growing faster to create more and better paying jobs. Today I remind my readers of the need for better fiscal policies as well to address our massive and steadily deteriorating debt problem.
As the American Enterprise Institute, among many other think tanks, makes abundantly clear, we are spending more and more of our federal budget on entitlements as opposed to all of the many other federal responsibilities which are lumped together as discretionary spending. In other words, the only way to fix our deficit and debt problems is to achieve better control over entitlement spending.
AEI has some excellent ideas on how to do this:
Social Security should move towards providing a universal flat benefit, set at the federal poverty level, for all U.S. residents aged 65 and older. Social Security would then become a guarantee against poverty in old age rather than a scheme for partially replacing pre-retirement earnings for middle and higher earning households.
Health Care. The Affordable Care Act should be replaced with a less regulated system (i.e. no mandates). The federal tax preference on employer plans could be limited to the cost of catastrophic (high deductible) insurance plus a contribution to health savings accounts. Households without employer coverage would receive a comparable tax credit.
Medicare would be converted into a premium support system with a fixed level of support comparable to that provided by employers.
Medicaid would be converted into a block grant program for the states based on the fixed, per capita costs for enrolled populations.
Other Safety-Net Programs should emphasize work as the key to improved economic prospects plus greater state control over resources in order to encourage innovation.
Conclusion. It should be emphasized as strongly as possible that the purpose of entitlement reform is to preserve and strengthen entitlements, not to weaken ordestroy them. Without such action we are headed for a much worse financial crisis than the one we had in 2008-2009 which will put all government social programs at risk.
We are currently living in a high risk fiscal bubble. Low interest rates mean that our enormous and rapidly growing national debt is virtually “free” money. When interest rates return to historically normal (much higher) levels, interest payments on the debt will explode putting us in a precarious fiscal situation.
As I have pointed out in the last few posts, it is the cost of entitlements and, in particular, health care entitlements, i.e. Medicare and Medicaid, which is driving our debt problem. The most effective way to control these entitlement costs is to control overall health care costs by insisting that all of us have more “skin in the game,” meaning that we must pay more of our health care costs directly from our own pockets as opposed to having them paid by third party insurance companies. The latest report from the Congressional Budget Office, just a few days ago, shows that our debt problem is even worse than was projected just a year ago (see above). The second chart (just above) shows the magnitude of the effort it will take to get our debt under control. Just to stabilize the debt, i.e. to keep it from getting any worse than it is right now, will require a combination of spending cuts and/or revenue increases of 1.7% of GDP which amounts to $330 billion in 2016 dollars. Conclusion. We have a huge national debt problem which is only going to keep getting worse until we make somewhat painful changes in federal policy. We have to either restrain spending increases and/or increase taxes by significant amounts. Health care entitlements are the biggest problem area and Medicare is worst of all.
Our two presumptive presidential candidates, Hillary Clinton and Donald Trump, are completely ignoring this grave problem. And indeed their proposed policy initiatives will only make it worse!
Do we have the strength to deal with this dire problem short of another crisis?