More on the fiscal outlook

Posted by on September 7, 2010 @ 8:34 am in Economy & markets

My recent post on the government’s fiscal outlook generated several thoughtful comments.

Two readers mentioned Paul Krugman’s op-ed on Social Security in The New York Times. It is true, as Krugman points out, that Social Security is only a modest part of the fiscal problem. Using statistics from the Congressional Budget Office (CBO), federal spending on health programs and Social Security is expected to grow from 10% of GDP to 16% over the next quarter century. About 1% of that growth is due to Social Security, according to CBO; the other 5% is due to health programs.

The Social Security increase is a pure “aging” effect—it’s from having relatively more retired boomers and relatively fewer workers paying Social Security taxes. One advantage of reforming Social Security is that, after decades of study, we have a clear idea of what can be done to bring the program itself into balance. In fact, there is a simple cartoon book on the reform options where you can sketch out your own plan.

Most of our fiscal imbalance arises from health care costs. Those cost increases are occurring as a result of two intertwined trends. The first, as with Social Security, is the aging boomer effect: Older people spend more on health care than do younger people, and with the baby boom we’ll have more older people collecting benefits.

The second is that health care costs across the population, for the retired and the nonretired, continue to grow faster than the economy itself. So we have “excess” growth in health costs in programs targeting the aged (Medicare, the part of Medicaid paying for nursing home care) and those targeting children and the working population (the other part of Medicaid for the poor, the Children’s Health Insurance Program, and the new insurance exchanges).

The problem is that cutting health expenses is a much more daunting task than reforming Social Security. There are no simple books laying out the options. A number of areas have been fingered as the cause, including the rapid growth of expensive technology, regional differences in treatment patterns, and medical costs at the end of life. I am no expert on the issue and so will leave that question to health policy wonks.

But it’s simple math. We have growing costs due to the pure demographic effect—having more retired Americans relative to the working population collecting benefits. We have growing costs from a system-wide increase in health costs affecting all Americans. And unless something is done to tame both trends, the red ink will continue to flow.

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