Most people in the United States have probably heard about the Wall Street efforts to cut Social Security and Medicare. There is a vast list of organisations such as Campaign to Fix the Debt, the Can Kicks Back, Third Way, and many more that have, as a central agenda item, cutting back or privatising Social Security and Medicare. When we hear one of these organisations tell us these programmes should be cut it is not a surprise.
The question is why do mainstream news outlets including the New York Times and Washington Post use their news sections to tell the same stories? Last week, when the Congressional Budget Office (CBO) issued new long-range budget projections, both papers were quick to ignore the numbers and to tell readers that we have to cut Social Security and Medicare.
The reason why this coverage was so bizarre is that it is not news that Social Security and Medicare will cost more in the decades ahead. We actually have known about the rising cost of these programmes for about 50 years. The birth of a huge number of baby boomers in the years 1946 to 1964 pretty much guaranteed this outcome – barring a horrible war, famine or epidemic.
While the aging of the baby boomers may not have qualified as news, there was actually important news in the CBO projections that went unmentioned in both newspapers. CBO lowered its projections for health care cost growth, meaning that Medicare, Medicaid, and other government health care programmes are now projected to cost less in the decades ahead than had been assumed in prior years.
This change is substantial. The new projectionsshow that spending on Medicare and other government health care programs will be 7.6 percent of GDP in 2035. By comparison, just two years ago CBO projected that Medicare and other health care programs would cost 8.5 percent of GDP in 2035.
The difference of 0.9 percentage points of GDP between the 2011 cost projection for these programs and the most recent numbers would translate into roughly $150bn a year in today’s economy. In other words, this is a big deal. The change in the CBO’s projections of healthcare costs certainly comes closer to standard definitions of “news” than the aging of the baby boomers.
However, there is more than a question of newsworthiness here. Both papers harped on the idea that Social Security and Medicare needed to be cut in order to bring the budget into long-term balance. Cuts to these programmes are usually put in the context of a “grand bargain” which would also involve some increase in taxes.
For a couple with an income of $500,000 a year, the tax increases put into effect at the end of last year would translate into a tax increase of roughly $3,000.
The CBO projections imply a substantial cut in spending on these health care programs, most of which would be borne by seniors getting Medicare and Medicaid. In today’s economy, the new projections would imply almost $1,700 less in spending per year on each beneficiary, or a reduction in spending of $3,400 on a senior couple. This is for an age group with a median cash income of a bit more than $20,000 a year per person.
By comparison, we heard endless sob stories about how the ending of the Bush tax cuts would hurt higher income people. For a couple with an income of $500,000 a year, the tax increases put into effect at the end of last year would translate into a tax increase of roughly $3,000.
If we had crafted a grand bargain three years ago, would anyone have suggested cuts in Medicare and Social Security that would have cost a typical senior couple more than $3,400 a year? In other words, the new CBO projections might imply that much of any needed cuts in spending on seniors have already been accomplished.
It’s true that the lower projections are based on lower projected cost growth and not a reduction in services, but it’s difficult to see why this would matter. There is an enormous amount of waste in our health care system which leads us to spend more than twice as much per person as the average for other wealthy countries. In fact, if our per-person health care costs were comparable to those in other wealthy countries our long-term budget projections would show huge surpluses, not deficits. Do the grand bargainers have a scorecard where we only count cuts that lead to inferior care for elderly people, as opposed to the elimination of waste?
Turning to the revenue side of the picture, the new projections are striking in the extent to which they show the long-term problem is really a lack of revenue story. In the late 1990s, the CBO projected that revenue would average 21.1 percent of GDP into the indefinite future. If revenue were actually at this level, the new projections show that the primary budget would be in surplus for almost two decades, and the debt-to-GDP ratio would be falling sharply.
The take away from these projections is that, if we had tax rates comparable to those of the 1990s, then the budget would pose no problem whatsoever long into the future. Even with current tax rates, the deficit is a relatively distant and minor problem. Unfortunately, the papers have endless space to tout the Wall Street agenda for the need to cut Social Security and Medicare. They seem to have no space whatsoever for discussing stimulus, a lower-valued dollar, or work-sharing – the policies that would address the real world crisis of mass unemployment.
Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.
You can follow Dean on twitter @DeanBaker13