US entitlement reform is urgently needed

The writer is a Hoover Institution fellow and directs domestic policy studies in the public policy programme at Stanford University

The long-term fiscal impact of the coronavirus-related shutdowns in the US is only beginning to come into focus. A pandemic-induced economic slowdown, coupled with trillions of dollars in spending to provide support to those affected, will push the US national debt up to 118 per cent of gross domestic product by 2030 and more than 200 per cent by 2050. The yearly budget deficit grew by $846bn last month alone, or 100 times more than it grew in June 2019.

Policymakers need to grapple with the implications of these shortfalls in the coming years. But a more immediate concern should be the impact of the slowdown on the sustainability of the entitlement programmes that many Americans rely on.

Social Security retirement benefits, disability insurance payments and Medicare hospitalisation benefits are disbursed from trust funds that workers and employers have paid into. The crisis is hastening the exhaustion of these funds through declining revenues and larger outlays. Trust fund revenues are shrinking as collected payroll taxes decrease because of lost jobs and wages. They have also declined as fewer Social Security beneficiaries now make enough income to have those benefits taxed. Finally, in a low interest-rate environment, the bonds held by the trust funds yield less income.

The Committee for a Responsible Federal Budget estimates that the Hospital Insurance Trust Fund will be exhausted by 2024. Meanwhile, the Social Security trust funds will run out of reserves anywhere from three to nine years sooner than expected. The University of Pennsylvania’s Wharton Budget Model project estimates depletion by 2032, while the Bipartisan Policy Center concludes the funds could be exhausted as early as 2026.

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Once the trust funds are exhausted, US law requires that payments to all retirement and disability insurance beneficiaries be cut uniformly and across the board. There is no similar requirement for Medicare, but Congress would face pressure to address the shortfall by precipitously raising taxes, cutting benefits or both.

Because of the slowdown, entitlement reform cannot wait any longer. The next round of pandemic fiscal relief offers a chance for Congress and President Donald Trump to take a bipartisan step towards saving Medicare and Social Security. The package is not expected to include big changes, but policymakers should put together an initial reform, even if it is limited, for each programme.

For Social Security, the measure of inflation used to calculate yearly cost-of-living adjustments could be changed to the so-called “chained” consumer price index, which takes into account shopper substitutions more quickly. This would address about a fifth of the programme’s long-term shortfall by slowing the rate of growth of benefits. Chained CPI is a more accurate measure of changes in living expenses and was even included in President Barack Obama’s 2014 budget.

Medicare imposes a morass of cost-sharing requirements on beneficiaries, based on the services provided and whether they are offered in a physician’s office or at a hospital. To reform the programme, lawmakers should introduce a single deductible and unified cost-sharing requirement for all types of care, while instituting an out-of-pocket cap to protect poorer seniors.

Neither of these reforms alone would address the solvency of the trust funds, but both enjoy bipartisan support and would represent an important step toward more far-reaching changes. Lawmakers should also include in the next Covid-19 relief package a mechanism to produce bolder, systemic reform of Social Security and Medicare.

One possibility is Senator Mitt Romney’s proposal to create new fiscal reform commissions specific to each trust fund, tasked with generating bipartisan solutions to return them to health. The reforms proposed by these rescue committees would receive expedited consideration in Congress.

The economic downturn created by Covid-19 has not only made the US fiscal condition significantly worse, but has also brought into sharp relief the need to strengthen the entitlement programmes that tens of millions of Americans rely on every day. Policymakers should not delay when it comes to taking an important first step towards addressing the future of these programmes.



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