Last year, the oldest members of the baby-boom generation turned 65, leading the demographic bulge that will come to dominate the nation’s entitlement programs, federal budgets, and political debates for years to come. Every day until 2030, 10,000 Americans will age into Medicare and Social Security, even as the proportion of young working people paying into the programs shrinks.
The graying of the population presents some difficult math, and it is complicated even more by the economic downturn’s hit on income-based entitlement programs, including Medicaid and food stamps, that have seen their enrollments surge. The Congressional Budget Office estimates that Social Security will grow from 5 percent of gross domestic product to 6.2 percent in 25 years, while Medicare will rise from 3.7 percent to 6 percent of GDP. Recent updates from the Medicare and Social Security trustees estimate that the retirement fund will be insolvent in 2033 and that Medicare will go broke even sooner; the hospital trust fund is expected to start owing more than it collects in 2024.
Mitt Romney sees those numbers and concludes that Washington must overhaul the entitlement programs to prevent a fiscal calamity. Taking his lead from his running mate, House Budget Committee Chairman Paul Ryan, R-Wis., Romney proposes big changes in Medicare and Medicaid that he says will improve the budget picture without robbing the country of a crucial safety net.
President Obama’s reform proposals sidestep sweeping change. He would retain the basic structure of the entitlement programs but hope, in the case of Medicare, that changes already enacted will reduce health care costs. His 2010 Affordable Care Act actually expands benefits for seniors and offers tax credits to middle-income Americans to buy health insurance. But it also commences a series of behind-the-scenes initiatives designed to hold down spending.
On their face, the two candidates’ visions for entitlement reform look quite different. And they would likely feel very different to beneficiaries. But they are based on the common belief that Medicare spending, at least, can no longer be open-ended. Obama plans to use government oversight to enforce new budget targets in the program. Romney would use consumer choice and market pressure to achieve quite similar goals.
Both candidates are mindful of the political risks involved in suggesting changes to entitlement programs, particularly those affecting the elderly. Regardless of their political leanings, older Americans are typically wary of alterations to the benefits they have come to rely on—or expect to receive when they retire. A recent Kaiser Family Foundation poll that tracks attitudes on health care issues found that 70 percent of seniors—including 53 percent of Republicans—would reject any change to Medicare’s benefit structure. They are similarly unenthusiastic about cuts to Social Security.
It’s worth noting that, despite attacks and counterattacks, neither candidate’s plan completely addresses the demographic pressure facing entitlements. On Social Security, Obama and Romney have remained fuzzy, despite widespread agreement among experts that to remain viable, the program will likely require reduced benefits and higher taxes for some recipients, as well as increases in the eligibility age. On Medicare, both men have focused their policies on reducing spending per beneficiary, a strategy that will lower costs somewhat but probably not enough to compensate for all of the program’s coming enrollees.
The president has already chosen his main path for entitlement reform. It’s called the Affordable Care Act. The health care law included Medicare and Medicaid reforms that Obama believes will transform the medical system, driving down spending without reducing benefits to seniors. The idea is that by making the health care system nationwide more efficient, the government can moderate spending on seniors, whose consumption of health care has consistently risen faster than the growth of the economy—and had even before their numbers swelled. “My own deficit plan would strengthen Medicare and Medicaid for the long haul by slowing the growth of health care costs—not shifting them to seniors and vulnerable families,” Obama said in a speech on the economy in June.
The law includes pilot and incentive programs to move Medicare payments away from the current model, where doctors and hospitals are paid for every service they offer, to one that rewards providers for keeping patients healthy at low cost. But it includes some budget cuts and payment ceilings that would theoretically slow spending even if the experiments don’t work.
On the goodies side, the law expands certain benefits for seniors. Over time, it closes the so-called doughnut hole, the gap in coverage that obliges seniors to pay out of pocket for prescription drugs. It requires insurers to cover a set of preventive services without co-payments. And it creates a system of tax credits to help non-elderly middle-income Americans buy private plans.
The law slows the reimbursement increases that Medicare offers hospitals each year, makes substantial cuts in special payments to safety-net providers, and establishes a board of experts with the authority to change payment formulas if Medicare spending grows faster than the GDP plus 1 percent, a historically low rate of growth. It also slashes subsidies to private insurers that participate in the alternative Medicare Advantage program. Those cuts enabled the Congressional Budget Office to score the law as a money saver and spurred the Medicare trustees to estimate that the law gives the program eight more years of solvency. Critics, including Medicare’s chief actuary, say that the assumptions about Medicare cost savings are unrealistic.
On Medicaid, the president has endorsed a massive expansion of the program as part of the law’s larger plan to achieve universal health coverage. Beginning in 2014, Medicaid could grow to cover all individuals earning up to 133 percent of the federal poverty line—about 17 million more people in total, assuming that every state signs on. Although the federal government will initially pick up the tab for the new patients, the change will be a massive undertaking for most states, many of which currently bar coverage for many nondisabled adults. Over time, the program is likely to shift more costs to state governments that are already feeling the budget pinch from rapidly rising Medicaid bills.
Still, the president has recently acknowledged that the reforms in the Affordable Care Act may not be enough to address persistently high budget deficits. In his fiscal 2013 budget, Obama proposed a series of additional cuts, including reductions in the prices paid to drug companies for certain patients, increases in co-payments for home health services, and fees on supplemental health insurance purchased by seniors to cover certain costs. He says that his proposals would save more than $300 billion over 10 years. Obama was also reported to have considered supporting an increase in the Medicare eligibility age during debt-ceiling negotiations with House Speaker John Boehner last year, although he has never endorsed that policy publicly.
Romney’s reforms are rooted in the philosophy that competition will do more to lower health care costs than government oversight and price controls. Instead of squeezing Medicare from within, he proposes to remake it as a private voucher program where seniors shop around for coverage that best suits their needs. The Romney plan would preserve the traditional fee-for-service system as one of the options and would use its benefits package as the benchmark for competing plans. But Romney would not guarantee that the government program would remain affordable for all seniors. His campaign has said that the size of the voucher would be determined through competitive bidding.
The most recent Medicare proposal from Ryan and Sen. Ron Wyden, D-Ore., would set a fixed growth target for the voucher, one quite similar to the rate sought by the independent board that is part of Obama’s health care law. The Romney camp, however, has been vague about whether it would follow this approach or use yearly bidding to set the voucher’s value. Because health care inflation is typically much higher than growth in the overall economy, annual bidding would mean a more generous benefit over time; a fixed target could shift more costs to seniors. The latter would reduce the budget more, but the former is likely to play better, politically.
Romney would slowly raise the eligibility age by indexing it to increasing longevity in the population. He would also subject Medicare benefits to a means test, so that wealthier seniors might get a skimpier voucher and have to spend more of their own money for their coverage.
For Medicaid, too, he would promote big changes. Instead of the current system, where the federal government and states split the cost of each medical claim and the federal government sets many of the rules for eligibility and benefits, Romney would convert the program into a block grant. States would get a lump sum and permission to organize their program as they wish. The grant would increase by a fixed target of GDP growth plus 1 percent.
That would be a strict diet for Medicaid, which has grown rapidly—especially in recent years, when the economic downturn has thrown more people into poverty. A recent report from the National Governors Association found that state Medicaid spending had risen at twice the rate of education spending in the past 10 years—and by 20 percent in the last year alone.
Romney has said that a block-grant system would give states more flexibility to innovate and more incentive to design efficient, fraud-free programs. “Let states care for their own people in the way they think best,” he said in a speech in June. Some states have welcomed the idea of reduced federal control. But critics say that Romney’s program couldn’t keep pace with the increased enrollment that comes as the result of demographic changes or recession and could result in slashed benefits.
On Social Security, both candidates are rather vague, but they appear to be fairly close in their thinking. Unlike President George W. Bush, Romney has not endorsed a privatized approach to the pension program. Obama and Romney have said they would be open to raising the retirement age, which is already on a slow climb to 67. Both also say that richer beneficiaries should get less from the system, although they differ slightly in how they would accomplish that: Romney has said that wealthier seniors should get smaller benefits; Obama has indicated that he might like higher earners to pay more into the system. Neither has spelled out specifics.
Entitlement reform, whether it involves Social Security or Medicare, poses political challenges for any candidate. On one hand, neither Obama nor Romney wants to appear cavalier about the prospect of entitlement programs consuming an ever-larger share of the federal budget, driving up deficits, and crowding out spending on other programs. On the other hand, specific plans can scare seniors and offer targets of opportunity for opponents.
Entitlement reform is likely to be an issue where each candidate will try to score points by accusing his rival of advocating a cure that is worse than the disease—particularly for older Americans.