In the vote to avoid the fiscal cliff, Congress agreed to address tax cuts now and spending cuts over the next two months. Before it was decided that the cliff deal would be limited to tax changes, President Barack Obama had proposed adjustments to Social Security and Medicare.
Will he be prone to reoffer these concessions in the upcoming round of negotiations? He should not.
These are insurance programs, and the government has a significant cost advantage in providing them. To bargain away those advantages simply raises costs to the nation. While the financing and solvency of these programs may need shoring up from time to time, their role in society and macroeconomic policy makes them vital to the economy.
Medicare insures against the costs of health care. Consequently, health care costs drive Medicare program costs. For decades, health care costs have been on an unsustainably rising path, albeit a flatter path recently due to the recession and current anemic recovery.
If the rate of increase in health care costs can be flattened, in good times as well as bad, then per person Medicare program spending growth will flatten as well. But if the rise in health care costs continues, cutting Medicare benefits will simply shift costs to the individual, not make them disappear.
For example, consider one of the suggested ways to constrain Medicare expenditures: increasing the Medicare eligibility age from 65 to 67. Faced with this cost shift, some individuals would rely on Medicaid. No savings there. Those still employed between ages 65 and 67 would rely more on their job-related plans — another shift without savings. In fact, the Congressional Budget Office estimates that this move would increase costs to patients, employers and Medicaid by more than the amount Medicare would save. That net increase in cost is a measure of why we have Medicare in the first place — it is cheaper.
In all discussions of "entitlements," Social Security must be separated from Medicare. It is wrong to lump them together as if they are one large program with the same funding problems. We need look no further than Rep. Paul Ryan for proof that Social Security costs are not out of control. On page 50 of his "Path to Prosperity," (http://paulryan.house.gov/uploadedfiles/pathtoprosperity2013.pdf), he clearly demonstrates that the cost of Social Security is roughly a constant 5.8 percent of GDP to 2030 and after that falls slowly as the baby boomers pass on.
Some argue that a fair way to cut Social Security program costs is to reduce the adjustment of benefits for inflation. The rationale is that because of different spending patterns the elderly suffer less from inflation. Accordingly, a slower-growing index, dubbed the "chain-weighted" Consumer Price Index, reflects changes in the cost of living of the elderly better than the conventional CPI.
In fact, a preliminary study by the Bureau of Labor Statistics indicates that it would do the opposite. They calculated a consumer price index specifically for the elderly population (CPI-E) for the years 1990-95 and found it rose 1 percent faster, not slower, than the conventional CPI. This experiment cautions that the conventional CPI underestimates rather than overestimates the impact of inflation on the elderly and that the use of a chain-weighted CPI would result in an even greater underestimate.
Using the payroll tax as an economic stimulus tool. In addition to their role as social insurance, both Medicare and Social Security have acquired a new role unrelated to insurance: recession-fighting. Their primary funding source, the payroll tax, can be temporarily adjusted down to enhance aftertax consumer purchasing power during recessions or anemic recoveries.
Two years ago the payroll tax rate was lowered by two percentage points as a tax "holiday." This holiday put more money into the pockets of millions of Americans to encourage them to spend more, strengthening the recovery from the recession.
Econometricians tell us that this stimulus worked, as reflected in improved job numbers, and they recommended its continuance. (To avoid any fear that these social insurance programs were being "raided," the Treasury replaced the payroll tax revenues foregone.) In the "cliff" deal, this holiday was declared over, removing an important stimulus from the macroeconomy.
Social Security and Medicare are not out of control. Social Security added nothing to the current deficit problem and poses no threat to the solvency of our economy. Medicare costs follow health care costs. Medicare cost growth will level off if health care costs level off, a key objective of Affordable Care Act, which will not even be implemented for at least one more year.
William L. Holahan, far left, is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.