Who Pays? More on the Impact of Raising the Medicare Eligibility Age

In a post last week, I wrote about the Congressional Budget Office’s new projection that raising the age of eligibility for Medicare from 65 to 67 could save the federal government $113 billion over the next decade. But I missed a big part of the story: that this savings might be far outweighed by increased costs to senior citizens, employers, and state governments.

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Raising Retirement Age Could Save $230 Billion Over Next Decade

In 1950, there were 7 people of working age – 20 to 64 – for every person 65 or older. That ratio is currently below 5 and will fall below 3 by 2030. – CBO, 2012

The current age at which someone becomes eligible for Medicare, the federal government’s health insurance program for seniors, is 65. Guess what the age was when Medicare was created in 1966? Continue reading

Quick Hits: Debt Crisis Conference Follow-Up

Image credit: Salvatore Vuono

On Tuesday, the Committee for a Responsible Federal Budget convened a major conference to discuss the nation’s long-term fiscal crisis. Key players like Ben Bernanke, Gene Sperling, Alan Simpson, and Paul Ryan were in attendance. You can read my recap of the event here; below is some follow-up on a few things I wrote about earlier.

(1) Most of the coverage of the conference has focused on Fed Chair Ben Bernanke’s warning to politicians not to mess around with the debt ceiling or treat it as a political game. As I pointed out, many others at the conference, including Gene Sperling and Neel Kashkari, gave the same warning. Hopefully it will be heard.

(2) Two additional perspectives on what level of economic growth the U.S. can realistically achieve in the coming years: Stanford economist and Hoover Institution Fellow John B. Taylor says we can reach 5% with the right policies in place. Donald Marron of the Urban/Brookings Tax Policy Center argues that reaching that level of growth and sustaining it over several years is highly unlikely.

(3) I posted earlier today about Larry Lindsey’s discussion of three ways we are underestimating the size of the coming debt crisis. One of his assertions was that we are underestimating the costs of the Affordable Care Act, a claim he based on a recent study from McKinsey. I pointed out that he was citing the McKinsey report incorrectly and that the study’s findings aren’t in line with previous estimates. I looked into it further today and found that a lot of people have been questioning the validity of this research.

Depite the weaknesses of the latest study, I think what I wrote in my earlier post is still valid – that we are likely misestimating (it could be under- or over-estimating) the costs of healthcare reform because there are so many unknowns about the impact it will have.

Three Ways We Underestimate The Size Of The Debt Crisis

At yesterday’s CRFB debt crisis conference, Larry Lindsey, a top economic advisor to President Bush, outlined three ways we are underestimating the size of our future debt. You might remember Lindsey as the NEC Director who was ousted for claiming the Iraq War would cost $100 to $200 billion, which other Bush administration officials claimed was far too high (we now know that the true cost is in the trillions).

Yesterday, Lindsey argued that the Obama Administration, the Bowles-Simpson Commission, and the House Republicans led by Paul Ryan are all making the following mistakes:

1. Underestimating interest rates

The Error: The current rate the government is borrowing at, 2.5%, represents a historic low. The average normalized rate over the past 20 years has been 5.7%.

The Cost: If rates normalize in 2013, we’ll owe an extra $5.4 trillion over 10 years in added interest costs. Lindsey suggested we won’t actually face these costs because the Fed won’t let interest rates normalize. But this will not please the markets.

2. Overestimating economic growth

The Error: The President’s budget estimates 4 to 4.5% annual growth over the next three years. But Lindsey and several others at today’s conference argued that the true rate is likely to stay around 2 to 3% for a while.

The Cost: The administration has calculated a cost of $755 billion over ten years for every 1 percentage point by which the actual growth rate fails to meet its projections. If we grow at 2.5% over the next three years instead of the 4 to 4.5% estimated by the administration, it will add $2 trillion to the deficit in the next ten years.

3. Misestimating the impact of healthcare reform

The Error: The CBO estimates that when the Affordable Care Act goes into effect in 2014, 9 to 10 million people (7% of employees) will lose their employer-sponsored health insurance and end up in the government-subsidized markets. The cost to the government for these people will outweigh the penalties paid by employers for not offering coverage. A recent study from McKinsey finds that 30% of employers say they will stop offering insurance after 2014, suggesting a higher number of people will be dropped onto the subsidized markets than previously thought.

The Cost: Lindsey seems to have misread the McKinsey study, because he stated that 30% of employees would be dropped and based his calculations on that incorrect assumption. Also, the authors of the McKinsey report admit that the 30% finding is higher than previous studies and their survey methodology may have something to do with this difference.

While Lindsey got the numbers wrong on the McKinsey report, I think he does raise an important issue: noone really knows what the short- or long-term impacts of healthcare reform will be on the government deficit, national healthcare costs, or the economy as a whole. How employers, individuals, insurance companies and other actors will respond to the reforms is still being hotly debated and, as the McKinsey report outlines, the predictions are likely to change as more people become aware of the reform provisions and their options under the new system.

The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?
Committee for a Responsible Federal Budget // Roundtable // June 14, 2011
(Lindsey’s remarks start at the 38:35 mark)

How US health care reform will affect employee benefits
McKinsey Quarterly // Shubham Singhal, Jeris Stueland, & Drew Ungerman // June 2011

Expert Panel On Fixing Our Long-Term Fiscal Crisis

Today, the Committee for a Responsible Federal Budget held its annual roundtable conference focused on our country’s long-term fiscal health. It featured an all-star line-up of participants from politics, business, and media, including Federal Reserve Chairman Ben Bernanke and National Economic Council Director Gene Sperling. I watched the whole thing online and found it to be a balanced, reasonable, non-dogmatic discussion. I hope this level-headedness and spirit of bipartisan compromise can make its way into the broader public discourse on these issues.

Several key themes emerged which many or most people at the table agreed upon:

(1)  We have to address our long-term structural budget crisis.

  • Unlike global warming, there don’t seem to be any “budget denialists” trying to argue this problem doesn’t exist. We’ve seen it coming for years – as Bernanke pointed out our aging population and booming healthcare costs didn’t appear out of nowhere.
  • The question is how will we fix it? We can deal with it now, in a gradual, deliberate way, or we can let it progress further into a crisis and then deal with it in a panicked, painful way. But there’s no escaping it.

(2)  Politicians shouldn’t use the debt ceiling limit as a political leverage point.

  • Bernanke, Sperling, Neil Kashkari, and many others spoke out strongly against a political game of chicken around the debt ceiling increase. A default or even a short-term crisis of confidence in US credit could have disastrous long-term effects.
  • Some disagreed and felt the debt ceiling could be useful to force political action. As Ruth Marcus said, “Washington only works by crisis.”
  • Rep. Paul Ryan claimed House Republicans don’t want to use the debt ceiling as a threat but see it as their only option since the Democratically-controlled Senate hasn’t produced a budget (see 0:26:28).

(3)  Economic growth alone will not get us out of the budget crisis.

  • Bernanke, Bob Reischauer, Alan Simpson, and others argued that this is a structural problem we cannot possibly grow our way out of (see 2:11:00).
  • Reischauer, Diane Swonk, and Larry Lindsey predicted that the economy will continue to grow between 2% and 3% annually in the near future, not the 4% projected by the Obama administration or the 5% promised by Republican presidential candidate Tim Pawlenty.

(4)  A long-term budget deal needs to address both spending and revenues.

  • Politicians from both sides of the aisle emphasized the need for everything to be on the table, including both revenues and spending. The process will fail if politicians continue to draw hard lines and refuse to even consider entitlement cuts (as some Democrats have) or tax increases (as some Republicans have).
  • One popular proposal is the 3 to 1 ratio: $3 in spending cuts for every $1 in tax increases, which was the proportion settled on by the National Commission on Fiscal Responsibility and Reform and which moderator Steve Liesman was pushing hard today.

(5)  The public doesn’t understand what’s at stake and that everyone will have to make sacrifices.

  • David Brooks and Ruth Marcus suggested that the American people either don’t care about or don’t understand the significance of the long-term budget crisis. People think there is a simple fix that can somehow avoid new taxes or reduced benefits.
  • Both Gene Sperling (at 2:42:15) and Gene Steurle (at 2:16:30) made great points about how to frame the issue and the importance of a sense of shared sacrifice.

(6)  President Obama has failed to lead on this issue.

  • Many at the roundtable stressed the need for strong leadership and asserted that President Obama has failed to explain this issue to the public and sell them on the idea that everyone is going to have to make some kind of sacrifice.

As some panelists pointed out, at this point the budget crisis isn’t an economic issue but a political one (though I’d argue that important economic projections, like the growth rate, are still being debated). The questions that remain: Will a comprehensive deal be struck before the Aug. 2nd debt ceiling deadline? Before the 2012 election? What will the balance of spending cuts and tax increases ultimately be? Will a deal really make substantive changes or will we keep pushing the hard stuff off until later?

The Debt Ceiling, Fiscal Plans, and Market Jitters: Where Do We Go From Here?
Committee for a Responsible Federal Budget // Roundtable // June 14, 2011

Republicans’ Dangerous Debt Ceiling Demands

The debt ceiling debate has been pushed back to August and, while almost everyone expects the ceiling will be raised, it won’t be without a political price and the Republicans are starting to name theirs. The Republican Study Committee (RSC), a group of conservative House Republicans, drafted a letter outlining three conditions for raising the debt limit:

  • Cut – Spending cuts that would reduce the deficit by half next year
  • Cap – A permanent limit on federal spending set at 18% of GDP
  • Balance – A Balanced Budget Amendment sent to the states for ratification, with protections against tax and spending increases

103 House Republicans have signed on to the “Cut, Cap, and Balance” plan, along with conservative advocacy groups like Heritage Action for America, the American Conservative Union, the Club for Growth, the Family Research Council, and Americans for Tax Reform.

The RSC offers no concrete plan on how their demands are to be achieved or what areas of spending should be slashed, but the level of proposed cuts is almost unfathomable even in a good economy. The RSC claims that cutting the deficit by half in 2012 would require spending cuts of $380 billion. The Urban/Brookings Tax Policy Center and the Economic Policy Institute both estimate the magic number is closer to $550 billion.

Even if the spending reduction needed to halve the deficit is $380 billion as the RSC claims, it would represent a decrease of 10% from the 2011 federal budget. In comparison, the 2012 budget proposed by House Republicans under Paul Ryan’s leadership would cut spending by 3%. Economists fear that such drastic spending cuts would cripple the still troubled economy and could push us back into a recession.

As Howard Gleckman of the Tax Policy Center points out, there are only two times in modern history when the US cut federal spending by more than 10% in a single year – at the end of World Wars I and II. Only when our military machine was quickly decommissioned and the economy was experiencing a post-war buzz were we able to achieve spending drops like those proposed by the RSC.

The RSC proposal seems to be part of an ongoing power struggle between moderate and Tea Party Republicans for control of their party. It could also be an attempt to create a political straw man so that more modest, but still drastic, spending cuts (like the 3% in the House Republicans’ proposed 2012 budget) seem palatable.

(Disclosure: I used to work for the Urban Institute.)