What Does the Tax Cut Deal Mean for Medicare, Social Security and Health Care Reform? Part 1

When President Obama struck a deal with conservatives on tax cuts, his opponents set the stage for 2012. With this legislation, the conservative agenda of the Bush administration once again becomes national policy. The goal: to redistribute wealth upward–even if that means letting the deficit balloon.
Not long ago, conservatives on the Deficit Commission were warning that the deficit represents a “cancer” that will "destroy the country from within."

Now, politicians on the right are arguing for tax cuts that will add $858 billion to the deficit over ten years—plus $383 in interest over the same span—bringing the total impact on the national debt to $1.24 trillion through 2020. And somehow, that is suddenly a brilliant idea?

Trust me, there is a method to Mitch McConnell’s madness: The larger the deficit, the more compelling the conservative case for  shrinking entitlements such as  Medicare, Medicaid, Social Security and Health Care reform in 2012.

                 Slashing Income Taxes–Who Benefits?

By extending Bush-era income tax breaks for the rich, the compromise endorses “trickle-down” economics, a theory which says that if you cut taxes for the very wealthy, they will spend more, creating jobs and lifting wages for the middle-class. In fact, the past thirty years have taught us that “supply-side” economics is a myth. While the top 2% watched their marginal tax rate plunge, middle-class incomes remained flat to down. And the Bush-era tax cuts for the rich did little to stimulate the economy. (See this Health Beat post for a chart which illustrates how middle-class incomes have stagnated, along with a table showing how marginal tax rates for wealthy Americans have fallen.)

Ignoring the lessons of the past, the McConnell-Obama compromise extends income tax cuts for those in the top 2% (individuals earning over $200,000 and couples bringing home more than $250,000) for another two years. Over that span, the windfall for high earners will boost the deficit by roughly $80 billion. On average, the affluent households that benefit from these cuts will save $25,000 annually—or $50,000 over two years—assuming that the tax cuts are allowed to expire in 2012.

Granted, the middle class also will continue to enjoy the Bush-era cuts, at a cost of roughly $310 billion. But when that $310 billion is divided among 98% of the population, the benefit for any individual household will be modest.

Indeed, when you add up all of the tax breaks in the “compromise” legislation, the poorest 20 percent of Americans save just $396 in 2011, and the middle 20 percent wind up with $1,521. Meanwhile, the richest 1 percent will save $76,949, according to Citizens for Tax Justice.

Finally, what most pundits don’t mention when they talk about the income tax cuts is that, under the “compromise,” lower-middle-class Americans will wind up paying higher taxes.  Families making less than $40,000 (and individuals earning less than $20,000) will lose refunds they received from the President’s “Make Work Pay” refundable tax credit that wasn’t part of the deal. (Thanks to Robert Borosage at “ourfuture.org” for highlighting this fact.)

                Paring Social Security Taxes: A Hidden Agenda

Declaring a one-year “tax holiday,” the compromise legislation also offers to reduce the amount withdrawn from worker’s paychecks to fund Social Security. In 2011, the Social Security tax would fall from 6.2% to 4.2% of income up to $106,800.

The 2% cut in taxes masquerades as a tool to stimulate spending and create jobs. But as Marc Pascal points out on “The Moderate Voice”: “Cutting the payroll tax for social security is not a viable economic stimulus measure and it will not create any new jobs. It merely underfunds the program so Republicans can gut it later because it isn’t paying for itself.”

Many pundits have suggested that middle-class households will use a larger paycheck to purchase the things they have wanted to buy for the past year. This, in turn, will create the demand that companies are waiting for before they begin hiring.

But the truth is that for the average middle class family (with joint income of $60,000) the tax holiday means that they save roughly $100 a month—or $1200 a year. Some may use this modest windfall to pay down credit card debt. This would be prudent, but it won’t create jobs. And many others are likely to find that an extra $25 a week disappears very quickly as they pay higher prices for the necessities of life: health care, utilities, gasoline and food. (The U.S. Dept of Agriculture forecasts that food prices will rise by 2% to 3% next year.)  Because global demand for fuel continues to outpace supply, Goldman Sachs predicts that the cost of oil will rise more than 10% in 2011, and another 10% in 2012.

Of course those who earn more would save more. But since only the first $106,800, of an individual’s earnings are subject to the Social Secruity tax, even wealthy taxpayers will save only $2,100. Meanwhile, this provision adds another $120 billion to the deficit.

As for the motive behind the cut, Holly Sklar, executive director of Business for Shared Prosperity, agrees with Pascal: the hidden agenda is to fulfill one of George Bush’s fondest dreams—cut Social Security benefits—or, better yet, privatize the program, and let the private sector do the dirty work.  She quotes Nancy Altman, co-director of Social Security Works; “President Obama and the Republicans will say that the payroll tax holiday is all about stimulating the economy. But don’t be fooled … There are many better ways to stimulate the economy with that $120 billion the tax holiday will cost, including simply extending the Making Work Pay Tax  Credit … And the other, better forms of stimulus pose no threat to Social Security.”

If legislators  wanted to give the middle-class a tax break, without reducing funding for Social Security—or adding $120 billion to the deficit—they could pay for the 2% cut by “scrapping the $106,800 cap on earnings subject to Social Security taxes,” Sklar notes.  This would also “eliminate the projected Social Security shortfall.” Alternatively, one could simply lift the cap—say to $140,000—shifting the cost to those who earn more than $106,800, without in any way undermining a program that so many seniors depend on. But of course taxing the wealthy and saving Social Security is not part of the conservative blueprint for America.

Moreover, as we head into the 2012 election, Altman suggests that politicians are likely to extend the tax holiday. I agree. Thus she calls the so-called tax holiday a “grave threat” to Social Security: “Cutting the tax while leaving the cap is a gift to those who want to cut, privatize and destroy Social Security under the pretense of saving it.”

Dean Baker, co-director of the Center for Economic and Policy Research shares Altman's concern that the payroll tax cut will not sunset at the end of 2011, but will continue “indefinitely.” In that case, Baker observes, “Social Security's finances will appear much more shaky. As it stands, Social Security is fully funded through the year 2037, but that doesn't keep the Washington Post and National Public Radio from running endless scare stories about the program's funding crisis.

“If the payroll tax is permanently reduced by 2.0 percentage points,” Baker concludes, it would double the program's projected 75-year shortfall. This would give far more ammunition to the Social Security fear mongers.” This would also mean adding $120 billion to the deficit not just in 2011, but year after year.

          Will Conservatives Let the Bush-era Income Tax Cuts Expire? 

I also believe that income tax cuts for the top 2% will be renewed beyond 2012. Consider what that would mean for the deficit. According to the conventional wisdom, over ten years, the tax deal will add $858 billion to the deficit (plus $383 billion in interest)—but the CW “assumes that each component of the tax extension deal expires on schedule,” notes Ernie Tedeschi, an economic analyst for the Pew Economic Policy Group. Tedeschi is skeptical.

Writing on his blog, “Lobster Stuffed with Tacos,” he explains: “If you believe that, then you expect that in 2012, the 2001/2003 tax cuts will expire for everyone, and individual income tax brackets will revert back to their 2000 levels.” Tedeschi observes that there is “good reason” to find this assumption “unreasonable.” If he is correct, “then the debt effect of the deal will be more than 6 percentage points of GDP in the long-run, possibly significantly more.” (Tedeschi emphasizes that the views he expresses on his blog are his alone, and not those of the Pew Economic Policy Group.)

I am afraid Teseschi is right. After all, just how likely is it that voters will accept what they are bound to see as a major tax increase if rates revert to 2000 levels? Do you really think that conservatives will graciously agree to give up the tax breaks that are so central to their agenda? Their goal, after all, is not just to lower taxes, but to shrink government. Permanent tax breaks would do just that. Are we certain that liberals will have the majority they would need in both Houses to ensure that the tax cuts are not renewed?

Those who support the Obama-McConnell truce insist that both the payroll tax cut and the income tax break for the wealthy will expire in one or two years. As the New York TimesDavid Herszenhorn explained last week-end: “The White House is betting that it will be far harder for Republicans to defend the tax cuts for the wealthy in 2012, when the economy is expected to be stronger.” 

But the truth is that the recovery is likely to be much slower than the administration suggests. In 2012 economists estimate 8 percent to 9 percent of all Americans will remain officially unemployed. Writing in the New York Times last week-end, even David Leonhardt, who calls the tax deal “a second stimulus” acknowledged  that: “Initial estimates . . . suggest that the [compromise legislation] will  reduce the unemployment rate by one-half a percentage point to a full point over the next year, compared with allowing all the tax cuts to expire and passing no new stimulus.” 

In other words, by the end of 2011, we can hope that only 9% to 9 ½% of the country will be officially unemployed—plus however many are no longer counted, either because they have given up looking for work, or because they have settled for a part-time job, even though they need a full-time job. (Those two groups are not included in the official unemployment number. When you acknowledge their existence, it turns out that roughly 17 percent of the U.S. labor force is now either unemployed or underemployed.)

Leonhardt continues: “By the end of 2012, the decline could be up to 1.5 percentage points.” That puts unemployment at 8% two years from now. Given the depth of the financial crisis, it could take years to bring unemployment down to the levels we saw in the 1990s.

Here it is important to differentiate between the economy on Main Street and the economy on Wall Street. In 2012, corporations may be reporting fat profits, but unless there is demand for their products, they will not be creating new jobs. “The president’s team is touting the corporate tax break that allows companies to write off investments completely in the next year,” writes Robert Borosage. “But its effect on jobs is likely to be very limited. Companies already are sitting on trillions in cash.” They have the money to create jobs, but not the customers. “Worse still the larger companies are using much of their investment to build plants abroad where markets are growing.” This will not help Main Street.

I am willing to grant that this tax deal may insulate us against a deeper recession. But we need more than that: Washington should be investing in America. Lawmakers should be spending money on infrastructure, education, the environment…This is how government could generate jobs. The demand for workers exists in the public sector where classrooms are crowded and bridges are crumbling. We could add to the wealth of the nation by tending to the people’s business.  But legislation that adds $1 trillion, or more, to the deficit leaves lawmakers empty-handed, killing the chances of a new “New Deal.” 

Thus, the economic recovery on Main Street—where most of us live—is likely to be painfully slow. And on Main Street unemployment is not the only problem.  “Home values aren’t recovering, and Americans have only begun to dig themselves out of excessive debt,” Borosage notes. Americans are not feeling wealthy. The years of compulsive consumption have ended.

Meanwhile, the deficit has turned into a shapeless blimp, hovering over the economy. How large will we let it grow? How will we pay it off? Conservatives have an easy answer.  First, let the deficit balloon, then take an axe to entitlement programs.

In part 2 of this post, I will discuss the cost of lower estate taxes, and why this is the part of the deal that is most important to conservatives. I’ll ask whether the President could have gotten a better deal, and why we needed to have a public debate about this bill.  Finally, I’ll explain why this is not “a second stimulus” package, and what it may mean for Medicare, Medicaid and health care reform.

32 thoughts on “What Does the Tax Cut Deal Mean for Medicare, Social Security and Health Care Reform? Part 1

  1. Admittedly, tax breaks are an inefficient form of stimulus, with tax breaks for the rich totally wasted. But in arguing that this particular bill will increase the deficit and therefore eventually lead to cuts in social programs is no different than saying any stimulus will do that. Are you saying there should be no stimulus now? If you’re saying the money would be more efficiently spent by government creating jobs directly (a good argument can be made for that), then the argument that tax breaks inevitably lead to cutting social programs doesn’t wash.
    Also, instead of the left hinting at dark conspiracies behind the payroll tax cut, they should be working at every juncture to get Obama, Republican Congressmen, the Social Security Administration, the CBO, and the Joint Tax Committee to confirm that every dime of the payroll tax cut will be credited to the Social Security trust fund. This 2 percent cut is a mechanism for delivering quick tax relief that almost makes up for the disappearing Make Work Pay tax credits for low-income families. It gives tax relief to everyone else, too, and the fact that even Warren Buffet will get a payroll tax cut on the first $106,800 of his income is despicable. But this tax cut is projected to create 700,000 jobs over the next year. Given the make-up of the next Congress, especially the House, and the likelihood that it will push hard to cut social programs no matter what, do you have an alternative?

  2. Merrill–
    It’s very good to hear from you.
    As you know, I consider you one of the very best health care reporters/analysts out there.
    In important ways, we agree.
    Yes, I am “saying that the money would be more efficiently spent by government creating jobs directly.”
    This argument will be a larger theme in part 2 of the post , but I point to it in part 1:
    “Washington should be investing in America. Lawmakers should be spending money on infrastructure, education, the environment…This is how government could generate jobs. The demand for workers exists in the public sector where classrooms are crowded and bridges are crumbling. We could add to the wealth of the nation by tending to the people’s business. But legislation that adds $1 trillion, or more, to the deficit leaves lawmakers empty-handed, killing the chances of a new “New Deal.”
    Responding to your second point, I realize that the plan is to re-pay Social Security for the tax cuts from general revenues
    If the SS tax “holiday” lasted just one year, that might happen. (Though it is still would mean borrowing from Peter to pay Paul–i.e. shrinking gov’t revenues) )
    More importantly, I just don’t believe that this Congress will let the SS tax cuts expire in one year. We’ll still be in the midst of a recession–and going into an election year.
    I’m not talking about a “dark conspiracy.” Conservatives have been very open about the fact that they believe that Social Security spends too much on “greedy geezers” and that they would like to make the income tax cuts permanent.
    You write that non-partisan experts have esimated that the 1-year SS tax cut will create 700,000 jobs over the next year.
    I just don’t see how that will happen. AS I explain in the post, the middle-class will see those modest paycheck savings disappear as they pay more for the ncessities of life–food prices, the price of oil and healthcare prices will be rising over the next two years.
    Meanwhile the upper-middle-class isn’t spending the way it did in the past. Many upper-middle class families are still trying to pay down credit card debt.
    HMeanwhile, their homes are worth less, and will continue to be worth less for many years. (As you know, real estate cycles move slowly.) This means that the upper-middle class will no longer feel wealthy.
    At best, the SS tax holidy plus the income tax cuts (which simply extend the income tax cuts we already have) will help insulate us against a further dip in he recession.
    But things won’t get better.
    In the end, I go back to the first sentence of your comment “Tax breaks are an inefficient form of stimulus, with tax breaks for the rich totally wasted.”
    I totally agree.

  3. Good post, Maggie. I can only conclude the republicans are hypocrites and the democrats have no courage. I believe the president tried to “compromise” to give himself a chance at getting reelected, but IMHO he did what was expedient and not what was right. I think he is a one-term president.

  4. Everyone wants a tax cut! It appeals to everyone’s desire for more money in their pockets. Repubs know this, and yes, I agree their real strategy is to artificially inflate the national debt through tax reductions so they can use that debt as an excuse to kill very popular entitlement programs.
    If the key words in the above sentence are “very popular”, then why in the world is the democratic strategy so silent about this future intent issue. For God sakes, let the people know what the Repubs are really doing and CLEARLY point this Repub strategy out to them every time tax cuts are the proposal along with why trickle down does not work!. THEN, some folks (hopefully a lot of folks) might actually get it and ask some questions about Repub intent. That would be a good thing.
    Do the Dems also want an excuse to kill social security and Medicare because if they stay mainly silent on this Repub strategy, then they are endorsing it, IMO!

  5. Thanks for sharing a brilliant post on how republicans use tax cut tactics to bait ordinary Americans to openly accept them as their good when in reality they would only spell disaster in the end for the country.

  6. This subject of wealth distribution and social policy is critically important to why I tend to be a democrat. If societies honor and give into human greed as lead social policy, this does not lead to good things in the long run. Yes, there is some modicum of innovation encouraged by greed, but the reality of human existence shows that societies that cannot work together for the common good break apart.
    I was just in the Netherlands last week, and it became quite obvious to me why the Dutch have learned to work together! Living below sea level and holding back the North sea is not a job for rugged individualistic behaviors. Such behaviors would have resulted in much of Dutch society
    drowning years ago, so they learn to work together.
    The middle ages let human greed run amuck to the point that in France, a few families controlled everything. Their unbounded greed led to huge numbers of people suffering while the few lived obscenely well for the times. Well that led to a revolution with the few getting their heads
    chopped off. Now the French tend to seek social middle ground.
    Somehow, somewhere America better learn from these examples, or we face a bleak future if we give in to this basic human greed impulse overwhelmingly in the name of shady visions of freedom!

  7. I am not a Republocrat, I think that both political parties are the problem not part of the solution.
    To Maggie -> You write “leaves lawmakers empty-handed, killing the chances of a new New Deal” I say I have no trust in lawmakers, so I say give them less money please.
    To NG -> Is the problem capitalism or is it too much power in the hands of a few? That question goes for big business, big unions, big government.

  8. Regarding the wealth gap, it is bigger now than during the Great Depression. No Republic, Democracy, or civilized society can be sustained like this.
    Even capitalism cannot survive this wealth gap!
    In regards to lowering 2% of the revenues into the trust fund, all that means is that the numbers in the fund will be lower. Those are numbers, like in your calculator, not a store of wealth.
    The wealth was loaned to the Treasury, and paid for current expenses. It’s gone.
    From a paper entitled “SSA’s FY 2010 Performance and Accountability Report,” published by the Social Security Administration itself!:
    Page 111
    “The U.S. Treasury does not set aside financial assets to cover its liabilities associated with the OASI and DI Trust Funds. The cash received from the OASI and DI Trust Funds for investment in these securities is used by the U.S. Treasury for general Government purposes. Treasury special securities provide the OASI and DI Trust Funds with authority to draw upon the U.S. Treasury to make future benefit payments or other expenditures. When the OASI and DI Trust Funds require redemption of these securities to make expenditures, THE GOVERNMENT FINANCES THOSE EXPENDITURES OUT OF ACCUMULATED CASH BALANCES, BY RAISING TAXES OR OTHER RECEIPTS, BY BORROWING FROM THE PUBLIC OR REPAYING LESS DEBT, OR BY CURTAILING OTHER EXPENDITURES. THIS IS THE SAME WAY THAT THE GOVERNMENT FINANCES ALL OTHER EXPENDITURES (By all other expenditures, I guess that would include battleships – my words). So, paying out of the trust fund makes it no easier to pay beneficiaries than if the trust fund didn’t exist. That’s because paying beneficiaries is financed in the same way we pay for battleships – out of current revenues and debt.
    Don Levit

  9. Don —
    The key thing about all that you are saying is that the debt to Social Security is exactly the same as all other government debt — there is no money actually put aside, it is all covered by bonding, and the bond holders will be paid out of current revenue or reserves and out of new debt. The government, unlike most companies issuing bonds, is under no obligation to have reserves to cover the debt or meet other performance criteria imposed by the bond holders. Right now, of course, the whole world is very happy to buy US government debt at rates near record lows and to buy as much as the government cares to issue.
    What you say is true — the government under Reagan, Bush, and Bush and continuing under Obama has used the surplus in the Social Security fund as a big cash gift to finance all the ships, planes, electronics, and free trips to Afghanistan and the Middle East that they were so fond of without inconveniencing the taxpayers (as I am sure you know, by far the largest share of the government spending that is funded from non-dedicated taxes is spent on either the military or on debt service and other costs related to past military spending.)
    The thing about this is that there is essentially no difference between the Social Security debit and the debits for all government debt except for the fact that Social Security has a huge number of actual US citizens who are vested in that debt and who by historical inclination vote very aggressively to support their interests. That group is due to grow even larger soon as the baby boomers — many of whom couldn’t or wouldn’t save effectively for retirement and have recently seen what little they did have in reserve melt in the recession and the stock market and real estate crash — retire.
    Consequently, I am very dubious that there is much chance that the government will default on those obligations, since it would result in too many members of the government being forced to find new work.
    In the end, IMO this will be solved by making adjustments not to the rates of payroll tax (which may actually be going down in response to the deal we have just seen,) but rather by adjusting the income ceiling that the payroll tax applies to upward. A return to the percentiles of income taxed originally envisioned and used at the beginning of social security would lift the ceiling to around $150,000, which would solve all Social Security problems until at least 2085, and possibly forever, allowing payment of obligations out of cash inflow as we have done up until now. Raising the ceiling, like the Medicare tax, to infinite (with or without a “donut hole” to exempt income in the $80,000 to $250,000 range or thereabouts) would “fix” Social Security forever and would make Social Security an ongoing cash cow as a source of other income for the government forever.
    Much of this could also be “fixed” by decreasing payments in various ways, but the problem with that is that politically this has a “here be dragons” sign attached.
    Medicare is another issue entirely, of course (which is why so many conservatives like to refer to a “crisis in Social Security AND Medicare,” since then there is a genuine crisis instead of a trumped up one.) The crisis in Medicare is so big that it cannot be fixed by simply applying more cash, since in the long run there just isn’t enough cash out there. It has to be fixed by applying some of the important lessons that Maggie has been giving all of us for so long.

  10. Joe Says:
    Is the problem capitalism or is it too much power in the hands of a few? That question goes for big business, big unions, big government.
    Strong social protection and redistribution regulations during and after a lifetime, provided through governments, are required to keep human greed in check, such human greed always tending to lead to wealth concentration in the hands of a few to the detriment of the many! America evidently has not yet learned this lesson well, and I fear we will pay dearly for this missed lesson!

  11. Pat:
    Thanks for your reply.
    The debt to Social Security is not like all other debt.
    Actually, there are 4 levels of debt that the federal government recognizes – from the strongest commitment to the weakest commitment.
    Debt Held by the Public is Level 1 – strongest commitment.
    Intragovernmental Debt (debt the Treasury owes the Social Security and Medicare trust funds, and other trust funds) is level 4 debt – the weakest commitment.
    Actually, what I am saying about the debt owed to the trust funds is that the financing of that debt is the same way that government finances all its expenditures – not just debt, but battleships, etc.
    They are financed by current revenues and debt.
    Since the trust fund is simply an accounting mechanism that reflects the “draw” the trust funds have on the Treasury, it does not represent a store of wealth.
    Neither does the trust fund balance make it any easier to pay beneficiaries than it is to pay for battleships. The only difference is that battleships need an appropriation.
    If this was truly an retirement/insurance plan as envisioned by Roosevelt, the trustees would have been put in jail years ago.
    The link I provided from the Social Security Administration itself should indicate the trust fund is merely numbers, since the actual dollars have been spent. Raising the tax ceiling will simply mean the numbers will be larger, such as numbers in your calculator. But, they don’t represent a store of wealth.
    Anyone who wishes additional government excerpts and links, I would be happy to provide them.
    This is not my word against Pat’s word.
    This is Pat’s word against the Social Security Administration, and the many other government web sites whose links and excerpts I have accumulated over several years.
    Don Levit

  12. NG – I agree with you. I think the first mistake made was in the lack of effective regulation to stop monopolist 800 pound gorilla companies. This is particularly evident in healthcare where the evidence is strong that health systems that dominate a market seem to generate higher costs.
    Big anything, business or otherwise, is simply too powerful to need to pay attention to the people it serves. And once you have no accountability, power corrupts for sure.

  13. NG, Joe Says, Don, Pat
    NG Thank you. Yes–“working together for hte common good” is what we need to do if we want a solid economy and society.
    Joe Says- If you don’t want politicians (or gov’t) to have money to spend, does that mean you would be happy to give up Medicare & Social Security?
    Don– Yes, the wealth gap is a huge problem which threatens both the economy and social solidarity.
    Pat– I agrre that eventually (hopefully in the relatively near future), we will have to lift the cap on the amount of income subject to the SS tax.
    We don’t have to do away with the cap altogether–just lift it.
    Politically, this won’t be too difficult, particularly if we do it in increments, over a period of time–ultimately lifting it to something like $150,000 (in today’s dollars) as you suggest.
    Thiis relatively easy fix will solve SS’s financial problems and make the tax more progressive.
    As you say, the U.S. is not going to default on SS. Political suicide.
    Finally, what we need to do to make Medicare solvent is going to be much more difficult. But we don’t have a choice. If we don’t rein in Medicare spending, Medicare will run out of money.
    The good news is that all of the people who have thought seriously about our health care system (MedPAC, IHI (berwick), Dartmouth researchers,, George Lundberg, Nortin Hadler,Atual Gawande, Uwe Reinhardt, Zeke Ennmauel, Bob Wachter, Diane Meier, the many, many researchers who have published in Health Affairs (too many names for me to list here) all agree on what needs to be done.
    They may differ on details, but by and large they are in complete agreement that Americans are overtreated. And that we overpay for so many health care products and services.
    The problem is clear, and those who have studied the problem also are quite clear on the solutions.
    The difficult part will be persuading patients and dcotors that “more care” is not necessarily “better care.”
    But eventually, that will happen.Even the mainstream media is beginning to send the message: articles on the stent scandal, etc.
    It will take time. But I am confident that this will happen.

  14. I would like your thoughts, but I’m afraid that disconecting Social Security payroll taxes in the financing and make it less popular with the parts of the public. Why payroll taxes and reactionary because the benefits out. If this link is not an argument that I keep to test means the program will become stronger.

  15. Maggie –
    When you say that social security has enough resources to cover full benefits through 2037, I don’t think you serve your readers well by implying that we don’t have to address the long term funding shortfall anytime soon. When the retirement age was raised as part of the reforms that passed in 1983, the phased increase didn’t even start to take effect until 2003, 20 years later. It won’t even be fully phased in until 2027 or 44 years after the legislation passed. The long phase in period was intended to give people time to adjust and plan for the changes to come.
    I have no problem with raising the wage cap to $140K-$150K to get us back to the point where 90% of the wage base is subject to FICA taxes as it was in the 1980’s. Other modest reforms that could strengthen the program include calculating the initial benefit based on the highest 38 years of covered wages instead of the highest 35 under current law. We could also apply an indexing approach that uses a blend of wage growth and price growth that would tilt more toward price growth for higher earners. Current law indexes benefit growth to wage growth which incorporates long term productivity increases. Raising the retirement age to 68 by 2050 and to 69 by 2075 also makes sense to reflect longer life expectancy. People could still retire at 62 if they want, but they would have to accept a steeper discount from the full benefit amount.
    On the healthcare front, we need to attack both utilization and medical prices. To do that, patients are going to have to learn to accept the word, NO and doctors are going to have to learn to tell them NO. No, you can’t have that MRI to rule out the one chance in 10,000 that your headache is due to brain cancer. NO, you can’t have a prescription for that drug you saw advertised on TV because it is unlikely to do any good. NO, you can’t have every last bit of end of life care no matter how futile and expensive and expect someone else to pay for it. To help doctors to say no more often, we need to back them up with litigation reform that gives them safe harbor protection from lawsuits when they follow evidence based guidelines and use health courts instead of juries to settle medical disputes.
    With respect to mitigating medical price growth, we need to make more use of value based insurance design, especially for high cost procedures including expensive surgeries, cancer care, advanced imaging, and medical devices. BCBS of MA is introducing a plan on Jan. 1, 2011 that will require higher copays if members want to go to one of 15 hospitals that are deemed high cost because of their market power and not their care quality for non-emergency care. The idea is to try to create some countervailing power against the most powerful hospitals that use that power to command higher prices than their care quality justifies. Doctors, for their part, historically didn’t consider it part of their job to know or care about costs. They will need to know and care in the future. To help them, we should have robust, user friendly price (actual contract rates) and quality transparency tools so they can access this information as needed. Finally, we will have to use cost-benefit analysis to help determine what services, tests, procedures and drugs we can afford to pay for.

  16. Don —
    Regardless of the technical (level one or level four) differences, Social Security is the debt that the government is most strongly obligated to pay because of the power of its creditors — the voters of the United States. This is like you owing debts to two sources, the First National Bank and Vinny the Crusher. Whereas the bank may have the senior debt, Vinny is likely to be the first you pay because he is likely to take you on a one way cruise if you don’t. Same with the voters — default on Social Security will lead to politicians and government bureaucrats being dumped in the bay in the next election.
    In reality, as I have said, this is fairly easily fixed. Plus while we are all worrying about the huge government debt, we should think back on the time when the debt was the highest in history: the fact that in 1946 the federal debt exceeded the GDP. Rather than that leading to an economic disaster it was followed by the greatest boom in US history, and the debt was easily reduced.
    Even now, the smartest people in finance continue to bet strongly that the US debt is secure and will not be a problem, recording that opinion in the most honest possible way by continuing to buy all the debt the US can issue at historically very low rates.
    The most important thing in dealing with the debt is getting the economy up and running, decreasing unemployment, and restoring demand. Hopefully our politicians will be able to avoid the temptation of political gestures that will serve to worsen the economy in the name of debt control and reduction, thereby guaranteeing a continuing recession that will make the debt even worse.

  17. Folks:
    I know it is hard to get this thought through, but the trust fund, which represents the surplus FICA and SECA contributions, is just numbers.
    I have provided excerpts and links to support that point.
    I have yet to see anyone post an objective statement which attests to the trust fund making it easier to pay benefits than to pay for battleships.
    My last excerpt from the Social Security administration itself seems to nail down that point.
    What about that excerpt does not support my opinion?
    If the trust fund surplus continues to be spent on current expenses, and (artificially)lowering the budget deficit, we’re going to put a lot of pressure on this ‘full faith and credit of the U.S. Government” creed.
    I made a presentation last week to a Unitarian Universalist Congregation on the financing of the trust funds.
    When I asked a show of hands, “Who do you have more faith in – God or the full faith and credit of the U.S. Government,?” it was a tie.
    Don Levit

  18. Pat:
    I agree with you that the citizens are counting on their Social Security “obligations” to be made good.
    And, as you probably know, over half of our seniors depend on Social Security for over half of their monthly benefits.
    As seriously as the citizens take those benefits, however, it is not reciprocated by the U.S. government.
    While the FICA and SECA contributions do pay out current expenses, the surplus contributions, as you have agreed, have been spent.
    The FASAB is the accounting advisor for the federal government.
    It looks at the government’s obligations very differently than Vinny the Crusher.
    In its paper entitled “Accounting for Social Insurance, Revised, Exposure Draft, Nov. 17. 2008,” it states:
    Page 31 The Alternative View (the present view of the FASAB) is that social insurance comprises two separate nonexchange transactions – the compulsory payment of taxes and the government’s payment of benefits (in other words, legally, these taxes are tied to the general welfare, not to Social Security beneficiaries, in particular).
    Page 35 – Social insurance benefits are not part of an exchange, but are a welfare program and/or an annual general fund program like Medicaid and defense (very different from Roosevelt’s vision of a self-supporting program, that was not viewed as a welfare program).
    Page 36 – The Primary View (not the present view of the FASAB, but probably the present view of most FICA tax paying citizens) – collecting taxes and paying benefits are not two separate non-exchange transactions, and the government should not be free to walk away from social insurance commitments.”
    Spending the surplus on general expenses would put trustees in the private sector in jail.
    Doing so indicates to me the government is not serious about its commitments.
    In fact, it doesn’t even consider Social Security benefits as a “liability” beyond the current year.
    I believe many atheists would have more faith in God, than faith in the federal government.
    Why would we be immune to either defaulting on our debts, or subject to hyperinflation, when a loaf of bread may cost $10?
    Is the U.S. some special God-given country in which history will not repeat itself?
    Don Levit

  19. Don Levit,
    I am having trouble figuring out what exactly is your point with all this social security warnings/info?? I don’t disagree with your info, but the political intent shaped by the eventually will of the people will answer your concerns. If the Repubs/conservatives can win the argument that the artificially inflated debt must be lowered on the back of seniors, then benefits will be cut, perhaps drastically. If they can’t, then the program will continue and be fully funded each year through revenues and/or debt. That is the situation in a nutshell; not whether the US government is stupid and capable of default, IMO.
    There is a conservative charade going on right now to try and get conservative ideological principles to win. Will this charade be identified and ended by the majority or not?? That is the question.

  20. NG:
    Your reply is your opinion, pure and simple.
    My posting from the Social Security Administration lends credibility to my statements.
    What objective excerpts and links can you provide?
    Do you really think, due to a fiat currency, and currently being the world’s currency, that we can continue our debt ad infinitum?
    History would tewl me the answer is “No!”
    Don Levit

  21. Don –
    What makes Social Security different from battleships and other defense spending is the combination of the dedicated tax and the direct relationship between the amount paid in and the ultimate benefit at retirement age, whether it’s 62, 66, 70 or somewhere in between. Each year, people in the system receive a statement from the Social Security Administration that reviews how much in taxes the individual and his or her employer paid to date and how much of a social security benefit will be forthcoming down the road. In short, most people perceive this as an earned pension as opposed to a means tested welfare program which largely accounts for its widespread support.
    Everything you say about the Trust Fund being a bookkeeping mechanism is correct. There is no store of assets comparable to state and local government or corporate pension funds. When we reach the point where more in benefits are being paid out each year than the FICA taxes coming in, the special purpose bonds in the trust fund will have to be redeemed by selling regular bonds, notes, and bills to public investors, both domestic and foreign. Can the program be changed by legislation? Absolutely, as it was in 1983. Then, benefit cuts were phased in very slowly and taxes were raised several times over the ensuing eight years, always right after an election cycle, by the way. Relatively small changes on both the tax and benefit fronts can make a big difference, and I suspect that’s what we’ll see. I don’t see it as an insurmountable problem and I don’t believe in privatization either even though I earn my living in the financial world.
    Medicare and healthcare more generally is the 800 pound gorilla in the room. That’s where we should be putting our energy and focus. A solution will be more challenging for all stakeholders. I think it’s fixable but it will probably take a crisis or near crisis to create the needed sense of urgency.

  22. Don–
    You have probably posted 20 or 30 comments on this blog about SS &
    how it is financed. We are all aware of your concerns on this issue.
    On this single thread, Pat and Barry have responsded to your concerns in detail.
    I and others have responded to your argument many times in the past.
    In the future, please refrain from trying to use this blog as a platform for your concern about this single issue.
    Each time you do this, you de-rail the dialogue about larger issues. We all have tried to address you pet peeve; I’m afraid this is all that HealthBeat can do.

  23. Barry–
    Thaks for your extremely lucid respone.
    I agree with much of what you say.
    Yes, we need to focus on value-based purchasing.
    But no, I don’t agree that patients should be asked ot pay higher co-pays to hospitals that over-charge.
    That would simply reinforce the belief that more expensive “brand-name” hospitals are always better. (Sometimes they are, but sometimes they are not.) And upper-middle-class people would wind up borrowing money to go to these hospitals. Others, who could’t afford the co-pays, would believe that they were being excluded from the “best” hospitals. .
    Instead, we must stop the gouging. Again, I recommend the Maryland solution. In Mayrland, all payers (Medicare as well as private insurers) pay all hospitals the same price for the same services. Adjustments are made for higher cost of labor in certain areas, more uninsured patients in certain areas, and the higher costs that teaching hospitals face.
    This solution has worked very well to curb rising hospital costs in Maryland. (Hopsital inflation is signficantly lower than it is nationwide.) And outcomes appear to be as good or better than in other states.
    Finally, we don’t need to use cost-benefit analysis.
    If we aimply apply compative-effectiveness information, we can easily cover teh cost of all truly effective procedures–whatever the cost.
    Right now 1/3 of Medicare dollars are squqndered on tests and treatments that are not as effective as the alternatives.

  24. Maggie –
    Regarding Maryland’s all payer system, I would like to see some data that compares Medicare’s cost per beneficiary in Maryland vs. its cost in the nearby states of VA, DE, PA and OH. West Virginia may have some issues peculiar to it such as higher than average obesity and poverty rates. Even in MD, though, teaching hospitals are paid more for a given procedure than community hospitals because of their inherently higher costs. Why should we pay extra for patients to get routine care at a teaching hospital when a nearby community hospital could provide it just as well for less money?
    The available research shows that many of the famous teaching hospitals provide care that is no better than other nearby hospitals for the most part. They get paid more because of their market power, not their care quality. If patients believe these hospitals must be better because they are paid more, they are mistaken. As either a premium payer or a taxpayer, I don’t think it is appropriate to let them go there for routine care with no more out-of-pocket exposure than they would have been subject to at the less expensive but equally good community hospital nearby. It’s very difficult to change behavior without changing the incentives that drive behavior. If a teaching hospital really does provide the best care for a handful of specialized procedure, there is no reason why we couldn’t place them in the preferred tier for those. Also, for care delivered under emergency conditions, the extra coinsurance would not apply.
    With respect to the notion that one-third of all care is waste or overtreatment, I’ve said before that it’s not so easy to identify waste at the individual patient level before services are rendered. There are different aspects of this problem that require different strategies to address. For example, some insurers are requiring that more conservative treatment be tried for a period of time before orthopedic surgery is approved. Shared decision making can also be helpful. In the case of advanced imaging, patients often want it to rule out a serious disease or condition “just to be sure” because it’s not invasive or painful and someone else is paying for all or most of the cost. If the evidence doesn’t call for the test, doctors need safe harbor protection from lawsuits, especially the failure to diagnose cases, if we expect them to push back against patients and say no. For end of life care, every hospital of any size should have a palliative care program. We should do everything we can to get as many people as possible, especially the elderly, to execute living wills and advance medical directives. For those who have neither, doctors should be able to apply common sense depending on circumstances without having to worry about being sued because they didn’t “do everything.” For prescription drugs, price negotiation coupled with limited formularies can help to push down drug prices. Finally, those extra copayments that patients would pay if they want to go to expensive hospitals for routine care can help to create countervailing power against the powerful high cost hospitals. Incentives matter. It’s not helpful to pretend that they don’t.

  25. I agree Barry, the most vocal critics for the amount of waste in the system often have no clinical experience. It isn’t as easy as they would make it seem. It often is no more than Monday morning quarterbacking. I’ve seen the mandated conservative treatment that you mention and if it does anything it just hardens a patients resolve and loses any positive psychological effect they may have had if they had bought into the treatment on their own free will through discussion. Telling a patient no to further someone else bottom-line, whether it be a state or federal government or private plan, isn’t my job. My patients will always know who is ultimately telling them “no you can’t have that”. Progressives have easily pointed fingers at physicians through this entire reform debate, they better be ready when we point back in the exam room.

  26. Barry, Joe Says and Jenga,
    Teaching hospitals are paid more in order to cover the cost of educating residents and medical students.
    If we want to train residents and students for the future, not the past, the hospital must have up-to-date equipment. It should also have healthcare IT. And it needs enough attending physicians to actually oversee the residents. (Many community hospitals that have residents don’t have enough attendings–and when residents work long hours unsupervised, patients are at risk. See my post about a healthy 12-year-old boy who bled to death, internally, over the course of four days while unsupervised interns and residents cared for him.)
    Educating med students and resdients costs money. When you include the cost of the technology that academic medical centers need, Med school tuition and the relatively cheap labor that residents provide does not come close to covering the cost of a med school education.
    That said, some med schools have struck a particularly rich deal with Medicare. I am told that NYC med schools are paid handsomely– thanks to a deal engineered by
    Senator Mooynihan long ago.
    Maryland does not have a particularly rich deal. And if you look at Dartmouth data, you will see that when it comes to over-treatment, Hopkins is mroe efficient than most NYC academic medical centers, so Medicare’s final bill is lower.
    Finally, we do want a large number of patients to go to Johns Hopkins so that students can be trained by treating them. (If we have too many beds in Maryland, non-teaching hospitals should be closed. Hopkins actually scores quite well when it comes to efficiency and outcomes.)
    Barry, don’t have time to do a point by point comparison for you of Medicare rates in Maryland vs. VA, DE, PA and OH!
    But I think you’ll find this article interesting, from the Baltimore Business JOurnal, December 1, 2010:
    “A new report by the body that sets Maryland’s hospital rates found that hospital admissions rose over the last fiscal year and the average bill was below the national average.
    The fiscal year 2009 report by the Health Services Cost Review Commission, submitted to Gov. Martin O’Malley Wednesday, found that the average amount paid for a hospital admission in Maryland rose from $10,443 in fiscal year 2008 to $10,767 in fiscal year 2009. The 3 percent increase was below the anticipated national average increase of 4.5 percent for the same period, based on data from the Colorado Data Bank, a hospital performance survey tool.
    Maryland’s rate of growth is also below the Consumer Price Index for hospital and related services, which is 6.5 percent nationally.
    Also, the mark-up in Maryland hospitals’ bills ¬— the difference between hospitals’ costs and what they ultimately charge patients — remained the lowest in the nation at 22 percent, compared with the U.S. average mark-up of 188 percent for hospitals nationally.
    An analysis of hospital costs ¬— what hospitals spend to provide their services ¬— shows that the average cost per admission at Maryland hospitals increased by 2 percent compared to an estimated 4.5 percent increase for the rest of the nation for the same year.
    Hospital admissions also increased by 1 percent, from 695,602 in fiscal 2008 to 703,323 in 2009. Hospital emergency room and clinic visits increased by 5.7 percent, from 4.1 million in fiscal 2008 to 4.3 million last year.
    Maryland hospitals largely remained financially stable, according to the report.
    The fact is that the Maryland solution seems to be working quite well.
    On waste– it’s not so hard to identify much of the waste in the system. There is an enormous amount of low-hanging fruit. See my recent post on stents.
    As for orthopedic surgery, more and more younger patients (under 50) are getting knee and hip replacements without trying physical therapy, medication, etc. first.
    Many of these patients will have to have a second surgery when the first replacement part wears out.
    This is all very expensive, and sometimes (not always) unnecessary.
    The only way to tell whether a more conseravtive treatment will work is to try it first. Insurers are doing patients a favor–recuperating from hip or knee replacement is not a lot of fun.
    And of course there are all of the things that can happen to you in a hospital while you’re there for the operation. . .
    As for the notion that higher co-pays will make patients go to less expensive hospitals, we have tons of reserach showing that high co-pays make patients delay –or never get– necessary treatment.
    Most of our health care dollars are spent when patient are seriously ill.
    At that point, they are not bargaining-hunting. Patients do not have the leverage to bring hospital prices down. (Virtually every healthcare economist now agrees that the health care market is unlike other markets in this way.)
    This is why utimately, hospital prices have to be set by Medicare–and by private insurers who will likely follow Medicare as it cuts increases to hospitals by 1% a year, refuses to pay for too many preventable readmissions, refuses to pay for preventable errors, and utlimately lower payments for some overvalued services.
    I’m sorry, but it’s Century Foundation policy to delete all comments which contain personal attacks.
    I don’t quite know what to say. The most vocal critics of waste have a great deal of clinical experience: Dr. George Lundberg (whose experience goes back to the 1950s), Dr. Atual Gawande,a surgeon, Dr. Jim Weinstein (now runs the Dartmouth Atlas project, a long-time surgeon, also saw over-treatment in the case of his young daughter who had cancer (see the film of Money-Driven Medicine), Dr. Don Berwick (a pediatrician), Dr. Diane Meier (a gerontologist, family practioner and palliative care specialist who won the McArthur Genius award and practices at Mt. Sinai) . . . I could go on.

  27. Maggie –
    There is no reason why the cost of training the next generation of doctors couldn’t be paid for as a separate line item from general federal tax revenue just as NIH grants plus philanthropy and a few other sources pay for most of the research performed at teaching hospitals. We don’t need to bundle the cost of medical education into the payment rate for each procedure. If we paid for medical education separately, the cost teaching hospitals incur that need to be covered by payments for services, tests and procedures to treat patients probably wouldn’t be all that different from a nearby community hospital’s cost structure.

  28. Barry–
    Take the cost of educating medical students from general tax revenue, and you have three choices: 1) raise taxes 2)cut spending or 3)add to the deficit.
    Congress is usually reluctant to raise taxes, and if it does, the increase may be regressive.
    Cutting spending would mean cutting services and investments that the country desperately needs.
    The deficit was already a major long-term problem; with this tax deal, it becomes a threat to the nation’s credit-worthiness. We add to the deficit at our peril.
    By contrast, when Medicare funds medical school education, a relatively progressive tax (the Medicare payroll tax, which applies to all earned income–even if you earn $2 million) pays for it.
    Moreover Medicare is in a position to demand value for taxpayers’ dollars. And going forward, Medicare is clearly going to become much more demanding. (The alternative is that Meidcare becomes insolvent)
    Luckily, today we have the right leadership in place
    to begin trimming Medicareoverpayments to some academic medical centers (as well as some other hospitals that just aren’t delivering good value.)
    If you took the cost of med school education out of general revenues, no one with in-depth knowledge of hospital operations would be in a position to oversee how the taxpayers’ dollars were being spent.

  29. Hi Maggie:
    “no one with in-depth knowledge of hospital operations would be in a position to oversee how the taxpayers’ dollars were being spent.”
    Which is precisely the problem today. No one watches healthcare or its expenses because its treting the ill, the elderly, and saving lives. Healthcare cost is a black box which begs for transparency.
    The answer to both Jenga and Barry is: Tell me what the costs are for one blood test when I have no insurance so I can decide whether I can afford it when I have pneumonia. You can’t and I have to make a decision blind and you will not treat me until I decide.
    Instead of dogging Maggie on data, why not do your own research on stats and present them. I believe both of you should come to the table with data that is objective and not so will-of-wisp subjective.

  30. Maggie –
    One of the components of the formula that determines how much teaching hospitals are currently paid by Medicare is an amount attributable to the cost of indirect medical education (IME). An alternative approach would be for Medicare to segregate that money out and pay teaching hospitals a lump sum for education based on some combination of their number of licensed beds and the number of physicians in training. CMS’ experts would still make the payment decisions, the money would still come from within the Medicare program, but the teaching hospitals would not have to be paid more for specific procedures than nearby community hospitals. If we expect teaching hospitals, in addition to their other functions, to take the lead in building accountable care organizations going forward, we should be looking for ways to bring their costs that need to be covered by payments for medical services into closer alignment with their non-teaching competitors. I think it could be done but it would require some new and innovative thinking.

  31. run 75411–
    Good to hear from you.
    I think that under Berwick, Medicare will break into that black box and begin to make payments more rational as they move away from fee-for-service.
    I agree that a hosptial should be able to tell you what a simple blood test will cost. But the price will always be higher than what it costs to actually take your blood and analyze it. Hosptials have huge capital costs (equipment etc.) as well as unpaid bills (even after health care reform, there will be uninsured people, particularly immigrants, legal and illegal. We aren’t going to leave them bleeding on the sidewalk outside a hospital.)
    Every person who enters a hospital pays part of the cost.
    In addition, the minute you get beyond a simple blood test, it is very difficult for a hospital to tell you what treatment will cost. They don’t know what they will find as your diagnosis evolves. They don’t know what tests doctors will decide to do in order to make a diagnosis. They don’t know what might happen to you in the hospital (you decide to go to the bathroom on your own in the middle of the night, slip and fall.)
    Medicine is an inexact infant science. There is so much abmiguity and uncertainty . . .This makes “price transparency” very hard.