At the 11th hour, Congress bought itself some time to find a sensible path forward—a path that a majority in both houses can support and the president can sign. This should be an opportunity to step back from the partisan struggle and look at the budget options and alternatives that people on both sides bring to the table. House Budget Committee Chairman Paul Ryan (R-WI), who will lead the negotiations for the House, has indicated that “entitlement reform” will be at the top of his agenda. Committee members should listen carefully to what he has to say and encourage him to provide more details than he has so far offered on how his proposed savings would be accomplished and how they would affect program beneficiaries and their families.
Rep. Ryan is correct in saying that if we are going to reduce the deficit through spending cuts, we have to take the lion’s share of those cuts from entitlement programs, specifically the three major retirement programs: Social Security, Medicare, and Medicaid. As an August report from the Center for American Progress shows, even before Baby Boomers started turning 65, these three programs accounted for all of the real per capita growth in federal spending over the past quarter century. Spending for discretionary programs—which are what we normally think of as the government, with its 15 departments and several dozen independent agencies—has declined by 4 percent since 1988 when adjusted for inflation and population growth. Spending for Social Security, Medicare, and Medicaid, however, has doubled over that same timeframe. Spending on actual government activities now accounts for only 30 percent of federal spending, while the checks Washington sends to retirees, bond holders, and other beneficiaries make up the remainder.
Looking forward over the next 10 years, Social Security, Medicare, and Medicaid will grow even more rapidly, simply because the elderly population will be growing so rapidly while discretionary programs are already slated to shrink dramatically. Total discretionary spending accounted for 9 percent of gross domestic product, or GDP, in 1988—the last year of the Reagan administration—but accounts for only 7 percent today. The Congressional Budget Office, or CBO, projects that this number will drop to 5.5 percent by 2023. CBO also forecasts that federal spending will reach 23 percent of GDP by 2023 and 24 percent later in that decade—all because of the cost of retirement programs and the interest we will pay on the borrowing necessary to support them.
Rep. Ryan’s proposal for changes in the tax law will result in revenues equal to only 19 percent of GDP, so we will have a deficit of about $1 trillion—or more than 4 percent of GDP—by 2023. To close that 4 percent gap without raising revenues, we will have to pare back these three big retirement programs by close to $1 trillion a year. That will be about one-third of what we are projected to be spending on those programs by that year.
If we made those savings across the board, hitting each program and beneficiary by the same amount, we would have to cut the average monthly Social Security check from about $1,270 to $830. Medicare would need to cut costs in the only way it can, reducing the portion of elderly medical costs covered by the program and passing the costs that are no longer covered on to the beneficiaries. Younger retirees now pay an average of about $350 a month in out-of-pocket medical expenses not covered by Medicare. That amount might easily double if payments made by Medicare were cut by one third.
Rep. Ryan and his colleagues have promised not to touch Social Security, which means they have to make much bigger cuts in Medicare and Medicaid. Based on CBO’s analysis of Rep. Ryan’s proposal in 2011, current retirees would not be affected by the proposal, but those turning 66 after 2023 would be included in the plan.
CBO believes that because Rep. Ryan would put new beneficiaries under private insurers, the cost of their health care, including insurance premiums, would be about 40 percent to 50 percent higher than the expected cost of health care under Medicare by 2023. Furthermore, CBO estimates that the voucher Rep. Ryan would provide to new beneficiaries would cover only 39 percent of the total health costs under the plan, leaving beneficiaries to pick up the rest. As out-of-pocket costs for current beneficiaries ages 65 to 69 currently average about $350 per month, CBO estimates that out-of-pocket expenses for new beneficiaries in 2023 would jump to about $870. That would leave a typical Social Security beneficiary with only about $500 each month from his Social Security check to meet living expenses other than health care.
Rep. Ryan has made numerous changes to his plan to try to address some of these issues, but CBO has not rescored these proposals either in terms of the savings that they would achieve or the impact that they would have on beneficiaries.
Equally big problems exist with respect to the reductions that Rep. Ryan proposes in federal support to state Medicaid programs. A CAP analysis of his first Medicaid proposal two years ago indicated that the burden that would be handed over to the states would far outstrip state capacities to generate the additional revenues necessary to sustain current Medicaid services. This has a number of implications that deserve careful attention.
For one, Medicaid covers the cost of 54 percent of all child deliveries and an equal share of prenatal and postnatal care. Failure to provide such care not only threatens the lives of expectant mothers and their unborn children but could also be the most expensive budget cuts in history, since such care has proven to dramatically reduce low-weight births, birth defects, and other chronic conditions that can dramatically impact government payments under a variety of programs. Equally problematic is the fact that two-thirds of Medicaid payments go to cover the health care of elderly and disabled people, who can’t pay the out-of-pocket costs required under Medicare as it now exists.
Rep. Ryan appears to be adding an additional burden on Medicaid because of the increased out-of-pocket payments that he would force Medicare beneficiaries to assume. More would be forced onto Medicaid, and beneficiaries would be forced to turn to Medicaid earlier in their life. But simultaneously, he is greatly reducing federal payments to the states to cover Medicaid costs.
The majority of Medicaid funds that are spent for the elderly and disabled are spent paying the high cost of long-term care. Medicaid is in fact the long-term care program for all Americans when everything else fails. Could it possibly continue to play that role at the funding levels that Rep. Ryan is proposing? How would Medicaid’s inability to provide long-term care to all who need it change lives not just for the elderly but for their children and their grandchildren as well? Are they prepared to assume that burden as part of the Republican approach to deficit reduction?
The new round of budget talks gives the country a chance to delve into these issues. Is there really support for these proposals, or have the words “entitlement reform” helped shield proposals from the scrutiny they deserve? It would be a great dereliction of responsibility for Congress to move in the direction of these policies without a clearer understanding of how much money they would actually save and—equally importantly—how they would impact beneficiaries. It would also be irresponsible for Congress to reject them without a full hearing and without the public’s understanding as to whether this is the right path forward.
Rep. Ryan deserves his day in court, and his colleagues in Congress, as well as his fellow citizens, should be all ears for the occasion.
Scott Lilly is a Senior Fellow at the Center for American Progress.