Be Wary of Entitlement Reform

I stumbled on this Robert Samuelson op-ed piece via Marginal Revolution.  I think Tyler Cowen was impressed with this sentence:

Older Americans do not intend to ruin America, but as a group, that’s what they’re about.

The key argument Samuelson wants to make is that Social Security and Medicare are not income protection programs, but welfare to the middle class.  He trots out this:

…some elderly live hand-to-mouth; many more are comfortable, and some are wealthy. The Kaiser Family Foundation reports the following for Medicare beneficiaries in 2010: 25 percent had savings and retirement accounts averaging $207,000 or more; among homeowners (four-fifths of those 65 and older), three-quarters had equity in their houses averaging $132,000; about 25 percent had incomes exceeding $47,000 (that’s for individuals, and couples would be higher).

Dean Baker had a reaction as he quickly notes that Samuelson defines down wealthy:

Let’s see, we have retirees who have their Social Security checks, plus a stash of $207,000. If someone at age 62 were to take that $207,000 and buy an annuity this money would get them about $15,000 a year. Add in $14,000 from Social Security and they are living the good life on $29,000 a year. And remember, 75 percent of the elderly have less than this.

Samuelson’s failures are even more egregious when one actually reads the Kaiser Family Foundation report which he cites as evidence for his position.  To give you a taste:

Half of all Medicare beneficiaries had incomes below $22,000 in 2010; less than one percent had incomes over $250,000

You can see where this is going; Samuelson is trying to co-opt a piece is titled “Protecting Income and Assets” into an attack on entitlements.  Skip to the summary of the report:

While a small share of the Medicare population lives on relatively high incomes, most are of modest means, with half of people on Medicare living on less than $21,000 in 2010. The typical beneficiary has some savings and home equity, but asset values are highly skewed and are significantly higher for white beneficiaries than for black or Hispanic beneficiaries. The income and assets of Medicare beneficiaries overall are projected to be somewhat greater in 2030 than in 2010; yet, only a minority of the next generation of beneficiaries will have significantly higher incomes and assets than the current generation, with much of the growth projected to be concentrated among those with relatively high incomes. Racial disparities in both income and assets are projected to persist for the next decades.

As policymakers consider options for decreasing federal Medicare spending and addressing the federal debt and deficit, this analysis raises questions about the extent to which the next generation of Medicare beneficiaries will be able to bear a larger share of costs.

The upshot of this report contradicts Samuelson’s arguement.  In reality, the very wealthy that would get means-tested out of Medicare and Social Security are few in number; if you want real program savings, you need to dig deeper. He is simply hoping none of his readers will click through to actually read the report.

I don’t even need to go into how Samueslson lumps together Social Security and Medicare and aging population and exploding medical costs for a narrow segment of the population.

This is just a PR-piece that is part of an effort to role part entitlement spending.  The broader goal from the Wall Street Journal:

House Majority Leader Eric Cantor on Wednesday suggested that Republicans will continue a push to overhaul programs such as Medicare, saying in an interview that “promises have been made that frankly are not going to be kept for many” and that younger Americans will have to adjust.

I often hear complaints that older Americans are sucking resources from the rest of the nation.  Consider what would happen in the absence of income protection for those older than 65 – many more would rely on their children for support.  That group then will be less able to save for their own retirement and, perhaps more importantly, would not be able to transfer resources down to their own children.  In other words, eliminate income protection for the 65 and older group places the next group in a position of choosing between supporting their parents or financing their kids college education.  Or giving up a job to take an elderly parent into their home.

You get the idea.  It is not obvious that everyone else will be better off if you reduce income protection programs. The costs stay the same; they just shift.

Now, you can argue that as long as we just focus on efforts on cutting benefits for younger Americans, there will be plenty of time for adjustment.  But what will be the costs of the adjustment?  Failure to have an effective insurance mechanism against old age – and given the market failures in the insurance industry, it is reasonable to believe the government needs to maintain a strong role in providing such insurance – will induce younger Americans to save more.  Great, you might say, households need to save more anyway.  But do we really need to hasten the process of deleveraging that is already underway?  That will simply slow near term growth, worsening the budget situation.

Interestingly, one of the complaints about China is that consumer spending is low because its citizens lack a sufficient safety net.  Shouldn’t the reverse argument work for the US as well?

In short, I am wary of entitlement reform.  It is not evident that is will lead to anything more than cost-shifting, and not necessarily positive or even zero-sum shifts.  What we really need is thoughful, aggressive healthcare reform that reduces costs while improving outcomes, something that it appears every other industrialized nation can manage.