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Tyler Cowen raises good issues with regard to the indexing of Social Security benefits, namely that the CPI is not a good measure (indeed, a bad measure) of the actual price situation facing the typical elderly person. This is relevant to both the CPI-linked growth in benefits post retirement and to the Bushian proposal to set initial benefits according to a CPI index rather than a wage index. The appeal of the latter move, to Bush, is simply that it's a cut, so I doubt he'll care about the merits. But the basket of goods purchased by elderly people is not the same as the basket of goods purchased by the average person. In particular, old folks spend a much higher proportion of their money on health care.

Of course we've got a different program -- Medicare -- to help old folks get health care. But that program not only provides benefits, it costs money. If Medicare premiums grow faster than the CPI (as they have for the past few years, and as they are projected to do in the future), then the functional (I would say "real" but that has a technical meaning) value of the Social Security benefit will be consistently cut every year not withstanding the fact that it stays constant in real terms. Of course even a wage index doesn't solve this problem as such, because Medicare premiums have been growing faster than wages as well. But since wages grow faster than prices, it at least helps matters somewhat, thus postponing a Medicare crisis.

And I do mean a Medicare crisis, for we face two. Right now, costs are growing so rapidly that the program is fast approaching unsustainability from the point of view of both individuals and the government. Of course, that which cannot be sustained will not be continued. Increasingly, this is not a "long term" budgetary problem, but a short term one. And I don't -- off the top of my head -- have a solution. But the point is that a solution must be found, and that something will be done about it soon enough. Reconnecting to the first point, it doesn't make a great deal of sense to think about how much money we should be providing to the nation's retirees if we don't know how we're going to handle the health care costs of the nation's retirees. Depending on how Medicare shakes out, one can envision different levels of Social Security benefits being tolerable. Not only the greater urgency of the Medicare situation, but also the SS-Medicare linkage suggest that Medicare reform should be tackled first.

January 6, 2005 | Permalink


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Nonsense, Matt. What Bush contributor would benefit by the administration working on Medicare? Unless some contributing industry or group of millionaires can benefit, what makes you think that Bush cares what happens to Medicare?

Posted by: Vaughn Hopkins | Jan 6, 2005 3:47:09 PM

i do know, off the top of my head, the first thing that should be done about medicare; i just don't know the second and third and fourth....

the first, though, is to rescind the awful bush prescription drug benefit, which, after all, hits the trifecta: a.) it's unaffordable; b.) it's bad policy; c.) seniors don't like it.

I felt that Kerry should have campaigned on this, both to prove his bona fides as a fiscal realist (as compared to bush the fiscal lunatic) but also to demonstrate that the dems knew the difference between a well-designed program and a terribly designed one.

Posted by: howard | Jan 6, 2005 3:48:52 PM

"And I do mean a Medicare crisis, for we face two. Right now, costs are growing so rapidly that the program is fast approaching unsustainability from the point of view of both individuals and the government."

A crisis to the tune of 62 trillion I might add.

Posted by: Green Democrat | Jan 6, 2005 4:01:03 PM

You did an analytical booboo:
"If Medicare premiums grow faster than the CPI (as they have for the past few years, and as they are projected to do in the future), then the functional (I would say "real" but that has a technical meaning) value of the Social Security benefit will be consistently cut every year not withstanding the fact that it stays constant in real terms."
Not so if the Medicare benefits purchased by the premiums go up enough (CPI, wage, whatever.)
Also, a possible empirical booboo. The other thing that is going up much faster than general inflation is education, not a necessity for old folk. You would have to back education off to appropriately index SS. (Okay, my 92 year old uncle takes courses at the New School, but I think we can all agree that this is a luxe item, not part of the SS safety net.)

Posted by: Joe S. | Jan 6, 2005 4:04:57 PM

If the Republicans remain in charge, they may be able to solve the problems of Medicare and Social Security simultaneously.

Posted by: bob mcmanus | Jan 6, 2005 4:24:42 PM

Seems to me that any analysis of what to do about rising Medicare costs has to start with an analysis of what is causing the rise is health care costs to begin with. To what extent is the rise attributable to the actual cost (i.e. labor and related expenses, and cost of invested capital) of the goods and services supplied, versus for example, additional profits being earned by pharma companies, insurance companies, and health care services companies(and perhaps to increases in wages paid to medical professionals at the top of the food chain)

In other words, maybe our health care costs are rising not because we are consuming more medical goods and services (or goods and services which cost more to produce), but simply because the rapid pace of consolidation amongst the suppliers thereof have provided a strategic advantage which enables them to extract higher prices from a highly fragmented base of customers.

Posted by: Jake Garver | Jan 6, 2005 4:51:10 PM

We are seriously misunderestimating the President here.

1. You shouldn't try to "solve" Social Security problems without addressing healthcare for the elderly.
2. The reason healthcare costs are so out of control is "frivolous lawsuits."
3. The way to eliminate "frivolous lawsuits" is Republican "tort reform."
4. Therefore, a cap on malpractice awards will save Social Security.

See? This whole private accounts thing is just a distraction from the real silver bullet - George is saving us all, and we're not even paying attention.


Posted by: T: Central | Jan 6, 2005 5:32:26 PM

If the real value of Soc. Sec. benefits were kept constant over time, we would still have future generations paying more into the system as the tax rate would apply to an ever rising employment income tax base. So future generations will be getting a worse deal than current ones. This is the point KHarris raised as a comment on Brad DeLong's webcite - and the one I noted in reference to the now infamous White House Soc. Sec. memo (@ Angrybear).

Posted by: pgl | Jan 6, 2005 7:52:30 PM

Great point again Matthew ... why don't you lead the shadow cabinet commission to fix Social Security? Or perhaps put such a thing together?
I think if rising medical costs were dealt with properly outside of the Social Security system, and you just looked at non-medical living costs, then perhaps some benefit cut via cola adjustment could happen (not as drastic as Bush's proposal). The other way would be means-testing benefits, but that might be a harder sell.
If the Dems can come out of this year with a consensus position on a sane Soc Sec fix, that would be a great accomplishment. It needs to be fixed every so often, it's that time again ...

Posted by: jimw | Jan 6, 2005 8:14:32 PM

One of the informal tests I have to see how open-minded my free-market friends are is to ask what they think about socialised medicine. If they instantly repond that its a bad thing then I know that they are either wilfully (if they're ideologues)or otherwise (if they've never looked at the question) ignorant.

On virtually any population health outcome measure you like to name, socialised or semi-socialised medicine performs better per dollar spent than market solutions. If you doubt me, go looking around both the WHO and the OECD websites for the cross-national studies (the latter, BTW, has to admit it between gritted teeth).

The US manages to spend a higher proportion of its GDP on health than any nation on earth, but has about the poorest aggregate health outcomes in the developed world. This is a direct consequence of severely flawed market structures that allow extensive rent taking by providers. Also the dependence on voluntary insurance leads to severe adverse selection problems.

As more and more of the US population becomes covered by Medicare I expect the overall efficiency of the system to improve. You just need to pay for it by taxation, rather than have even more taken out of your pocket to pay for private medicine.

Posted by: derrida derider | Jan 7, 2005 1:04:50 AM

Health costs are not going up because corporations are making more in profit. The health care industry is making the same profit margins they always have.

Health costs are going up because there is more health care to buy. The government measures health care costs not by indexing certain items and tracking them, but by the total amount spent on health care.

I spent $15 on internet in 1998. Today I spend $40 since I have DSL. According to government logic, my internet costs have more than doubled. Total internet spending increases every year, as does health spending, mainly because there are more options and greater demand every year.

If you just stopped the advances in care by not offering anything new, starting now, you'd see Medicare costs fall.

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