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Entitlement Reform: What Does It Mean?

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

Someone just asked me to give a talk on “entitlement reform.” I know reform is a good thing. And entitlement sounds bad. Merriam Webster’s online dictionary offers a definition: “a belief that one is deserving of or entitled to certain privileges.” Well, if greedy people out there are getting special stuff, we should fix it. A fix would be particularly important given the nation’s long-run fiscal challenges. But what special stuff? And where are they getting it?

Reformers claim that the special stuff comes from three main government programs: Social Security, Medicare, and Medicaid. These are big programs. They account for about 40% of the federal budget today and are projected to account for about 60% by 2030. So if these programs entitle people to special privileges, then they should be reformed. Fortunately, I know a lot about Social Security and a bit about Medicare and Medicaid.

Social Security is a terrific program. It makes us do what we would not do on our own – save for retirement. And it provides insurance in the event that we become disabled and for our dependents should we die early. The average worker who retires at 65 in 2012 gets 41% of pre-retirement earnings or about $1,400 per month. Social Security benefits are adjusted for inflation, and they keep coming as long as we live.

Social Security does need attention because projected benefits exceed scheduled taxes over the next 75 years. The good news is that the magnitude of the shortfall is totally manageable. And proposals abound for either reducing benefits or increasing revenues. Yes, those are the options. There is no magic bullet. My view is that we should close most of the gap by raising revenues, because Social Security will be the major source of retirement income for most Americans.

Medicare is a health insurance program, financed by a combination of payroll taxes, premiums, and general revenues, to ensure that older Americans and the disabled can pay for health care. Medicare is a major contributor to the deficit, and reducing Medicare costs would help the long-run fiscal outlook. The solutions fall into two groups: shifting costs to the elderly and disabled or controlling costs by eliminating ineffective and inappropriate treatments.

Most proposals would reduce Medicare spending, but – without a reduction in total health care costs – would simply shift the burden from the government to the individual. Some popular suggestions include:

  • raising the age of eligibility from 65 to 67;
  • raising the Part B premium to 35% of program costs;
  • raising co-payments and deductibles; and
  • introducing vouchers so individuals can purchase their own health insurance.

The real solution is to control health care costs themselves. This goal is difficult to achieve. Only doctors and hospitals can do it. They are more likely to do it if payments are based on the quality of the care provided patients rather than the number of procedures. None of the usual suspects for cutting Medicare are likely to improve the incentives to practice better medicine.

Medicaid is a joint state/federal health program for the poor. It also pays for long-term care for elderly persons who have depleted their resources. Medicaid is both a major contributor to the federal long-term deficit and a huge drain on state budgets. The projected increase in expenditures is driven by soaring health care costs and, as in the case of Medicare, by a rising number of older Americans who will need long-term care. These people are typically widows in their 80s who live alone, have little income, and may be suffering from dementia or some other mental impairment. They generally have no alternative. The Affordable Care Act of 2010 included a long-term care insurance program, but the program turned out not to be financially viable.

Social Security, Medicare, and Medicaid do not provide greedy people with special privileges. They provide the elderly and disabled some minimum income and health insurance after a lifetime of contributions and offer health insurance for the poor. These programs do need attention. Social Security faces a financial shortfall and should be fixed – the sooner, the better. The future of Medicare and Medicaid is inextricably tied to the cost of health care. This country pays more and gets worse health outcomes than most other developed nations. We need to practice better medicine. Short of “bending the health care cost curve,” proposals simply shift costs from the government to the individual. How does the phrase “entitlement reform” shed any light on these complicated issues?


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.