A State of the Union for Gen X and Gen Y

A State of the Union for Gen X and Gen Y
By Tammy Frisby
1/27/2011

In his State of the Union address, President Obama spoke about the pressing need to reduce the federal government’s budget deficit. Rep. Paul Ryan (R-WI), who gave the Republican response, joined in that chorus. But Americans under 50 did not hear what they needed to about the main sources of the runaway federal spending on the horizon: Social Security, Medicare, and Medicaid. There are unpleasant truths about the state of these programs that we all, but especially Gen X and Gen Y’ers, need to hear and then hear again. Because unless we slow the growth rate in federal spending, Gen X and Gen Y stand together in looking at a future of huge deficits, massive government debt, higher taxes, and anemic economic growth as private sector investment is crowded out by government borrowing.

So this is my take on what I wish the president and Rep. Ryan would have said to my and my son’s generations. In the interest of keeping this a reasonable length, I’m going to confine my comments to Social Security and Medicare, the programs that are funded and administered solely by the federal government.

The Facts

The bills for Social Security and Medicare are staggering. In 2009, the last year for which official government historical data is available, Social Security benefit payments totaled $678 billion. Medicare payments ran $499 billion. How does that $1.2 trillion in federal spending compare to federal revenue? Not well. For every dollar in government revenue (our tax payments make up about 96% of that) in 2009, 32 cents went to pay for Social Security benefits and 24 cents went to Medicare. If we continue under current law, each of these programs will cost, in nominal dollars, nearly twice as much by 2019 as they do today. We will also need to devote a growing share of our economic output to pay for these programs. Today, Social Security and Medicare spending is 8% of GDP. In a decade, they will be almost 10%. In other words, in nine years, one out of every ten dollars in the U.S. economy will go toward paying for these two social insurance programs for our parents and grandparents.

The projected spending growth in Social Security and Medicaid is not “unsustainable.”

Democrats and Republicans have latched on to the word “unsustainable” to describe the growth in Social Security and federal health care spending. The idea, I guess, was that “unsustainable” gave the problems we face the proper sense of gravity. And it was probably supposed to convey the idea that if something just can’t go on, we must do something about it, right?

I worry that, instead of having those effects, the overuse of “unsustainable” has done two things. For some, it has made the problems seem too overwhelming to tackle. For others, it has created a false sense that, whether we act or not, the rapid growth in spending will somehow, magically, subside. It’s unsustainable, after all.

Well, the truth is that growth in Social Security and Medicaid spending could continue at the projected rates for an undetermined amount of time. That additional spending would require higher taxes, more government borrowing (and higher debt means even higher taxes down the road), or a combination of the two. There is some point in time at which there would no longer be sufficient tax revenue and lenders would no longer be willing to finance our spending. But no one knows for sure when that would be. In the meantime, we just keep spending.

You should be really worried about Medicare.

The trajectory of Social Security spending is a big problem. On top of that, there are high political hurdles to making the necessary changes to benefits and payroll taxes that would make the program affordable again. But as much as politicians don’t like aggravating American seniors, lawmakers have managed to reach bipartisan agreement on a grand bargain to cut benefits and raise taxes in the past. If you leave the program for current and soon-to-be retirees largely intact, it is possible to make changes to shore up Social Security for future retirees.

So the policy solutions for Social Security are relatively easy in that we know what we need to do. It’s the politics that tend to be hard. If lawmakers believe that Gen X and Gen Y are committed to making the necessary choices about their Social Security, that will make the politics easier.

When it comes to Medicare, though, the policy is hard too.

When reasonable politicians and policy analysts are willing to go open kimono on reforming federal health care programs, they admit it is a daunting task to design policy that will maintain or improve the quality of medical care in this country while effectively containing costs. Unleashing any government policy into our complex health care system is bound to come with uncertainty about the effects, along with unintended consequences.

Are there policy proposals out there that aim to provide high quality health care for seniors while containing costs? Sure. But there are big tradeoffs to be made.

Policies that diminish the prospect of massive disruption to the current quality of care also increase both the time it is likely to take to reduce costs and uncertainty about whether the reform will even work. Federal funding for experimental Medicare payment programs, such as bundled payments to reimburse providers per illness treated rather than per service used by a patient, fall into this category.

Then there are proposals like those from Rep. Paul Ryan. Ryan has proposed reforming Medicare in a way that turns the program from an open-ended entitlement into a defined benefit. (Although he didn’t talk about this in the televised Republican response because the rest of the Republican caucus kept him on a tight leash.) Instead of writing what is essentially a blank check for each senior’s health care costs, each senior would receive a capped amount, in the form of a voucher, to be spent on private health insurance. The idea is that market forces would bring down the total cost of health care for each senior. Assuming the voucher amount is set low enough, the policy would control growth in Medicare spending even in the face of the aging of America’s Baby Boomers. The tradeoff for that kind of certainty in cost control is a lot of uncertainty about how the health care market would react and what would happen to the quality of care for Americans.

A lot of smart people know how to fix Social Security in ways that a majority of Americans would be okay with. A lot of smart people have ideas for reforming Medicare that might work, but they might not. We should start now trying to figure out what will work.

It’s no surprise that none of this was said. Since the 1970s, it has been something of a law of American politics that when the interests of seniors and younger Americans have conflicted, seniors have won out. Older Americans are well organized and well informed, in large part due to the work of the AARP. Their Social Security checks and Medicare benefits also mean they have a lot of skin in the game. So seniors have traditionally voted at much higher rates than the rest of us. Lawmakers like to avoid offending this large, active voting bloc.

It’s our own fault too. Almost everyone likes to think they’ll be old one day, so most people resist championing benefit reductions for a group of which they hope to be a part.

The time has come, though, for us to send a strong message to the president and Congress that we’re ready to support major reforms to Social Security and Medicare. Tell them we know there will be tough decisions about what we want and what we’re willing to pay for, but it’s time. Because this is a national conversation that Gen X and Gen Y can’t afford not to have.