By James Kwak
David Brooks’s commentary on Paul Ryan’s “budget proposal” is entitled “Moment of Truth.” Brooks falls over himself gushing about his new man-crush, calling it “the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes.” “Ryan is expected to leap into the vacuum left by the president’s passivity,” he continues.
First of all, Ryan’s plan is not “comprehensive” by any stretch of the imagination. Ryan’s plan does limit taxes to 19 percent of GDP and outlays to 14.75 percent of GDP by by 2050, producing a huge surplus. How does he achieve this budgetary miracle? In part, he does it by waving his magic wand. This is what the CBO has to say (emphasis added):
“The proposal specifies a path for all other spending [other than Medicare, Medicaid, and Social Security] (excluding interest) that would cause such spending to decline sharply as a share of GDP—from 12 percent in 2010 to 6 percent in 2022 and 3½ percent by 2050; the proposal does not specify the changes to government programs that might be made in order to produce that path.”
If you look at Table 2 of the CBO report (p. 16), you’ll see that the extended baseline scenario already shows non-entitlement spending falling from 12 to 7.5 percent,* so Ryan is pulling 4 percentage points out of thin air. But if you go back to Table 1 (p. 3), you’ll see that those 4 percentage points are all it takes to balance the budget in 2040 and 2050. So if I can use the same magic trick as Paul Ryan, I can balance the long-term budget right now, without touching Medicare or Medicaid.** In other words, if you believe Paul Ryan, there is no Medicare crisis (at least not through 2050).
So, without further ado, here’s my budget proposal: Leave everything the way it is, except that non-entitlement spending will do whatever Paul Ryan says it will do. Let’s see if David Brooks calls me a courageous leader.
Now, the Ryan plan is not completely devoid of details. It would be more accurate to call it a Medicare-Medicaid proposal, because that’s the main area where the plan actually says anything substantive. In particular, it converts Medicare into a voucher program. Beginning in 2022, 65-year-old beneficiaries would receive a voucher to spend on private health insurance. The value of that voucher would be set at the amount that the government is currently projected to contribute toward Medicare for a 65-year-old beneficiary in 2022. After that point, an individual beneficiary’s benefit would go up each year by the percentage by which health care becomes more expensive because of aging. All vouchers would also go up by the amount of the consumer price index.
The result is that government health care spending in 2050 falls to 4.75 percent of GDP instead of rising to 12.25 percent — a difference of 7.5 percentage points. But let’s think about how this has happened.
There are two ways that government spending on health care can go down. Either health care itself is getting less expensive, or the government is just paying for less of it. Hint: it’s not the former.
“A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare. Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare. Those higher costs would be offset partly but not fully by savings from lower utilization. . . . Moreover, CBO projects that total health care spending for a typical beneficiary covered by the standardized benefit under the proposal would grow faster than such spending for the same beneficiary in traditional Medicare under either of CBO’s longterm scenarios.”
So instead, what’s happening is the government is just paying for less health care. It’s doing this because the vouchers are designed to grow in value more slowly than the cost of health care. That’s where all of the cost savings come from.
Think about it. Does this accomplish anything? Yes, we have added a positive amount to the government’s fiscal balance. But we have done it by taking a larger amount from our aggregate household fiscal balance.
Let’s try an example. Today, we pay $100 in taxes; Medicare pays $5 in expenses and buys us $95 in health care. (That $5 in administrative expenses is just to have a round number, not a real estimate.) Let’s say that buys us all the health care we need.
The “Medicare crisis” is that thirty years from now, taxes will grow to $150, but to get the future-world equivalent of $95 of health care, the government will need to spend $200: $10 on expenses and $190 on health care. In other words, we’ll have a shortfall of $50. Because Medicare is an entitlement program, that shows up as a $50 government deficit.
Under the Ryan plan, we still pay $150 in taxes, only now we get back a voucher worth $150 that we can use to buy health insurance. Voilà! No government deficit. But to get a plan that is equivalent to what Medicare would have been, we now have to pay $210 to a private insurer, which will spend $20 on expenses and $190 on health care.
In other words, we’ve taken a $50 government deficit and replaced it with a $60 household deficit.
This is the problem with thinking of everything in terms of “taxes” and “spending.” The categories make sense if the government is buying things we would not have bought individually, like national security. But if we’re talking about things we would have bought anyway, the direction of the cash flows is irrelevant. All that matters is the bottom line. And the Ryan plan makes the bottom line worse.
Now, this is a simplification. Under the Ryan plan, we will not buy exactly the same health care that we would under Medicare. The Ryan plan will affect health care consumption, because poor seniors won’t be able to afford the health care they get now. So it will reduce overall spending on health care — but exactly by depriving people of care they would have had under Medicare. I think that’s called “rationing.” Now, I am in the camp that thinks that health care is already rationed today and will always be rationed, and we need to be honest about it so that we can ration it in the way that does the most good for the most people. But rationing it based on income is just about the worst way I can think of.
The other thing the Ryan plan does is it eliminates part of the insurance component of Medicare. Some insurance against being poor is still there: the funding comes via payroll taxes, but everyone gets the same benefit. (Actually, the benefits are a tiny bit progressive, since the top 8 percent by income get smaller vouchers.) But there’s no insurance against volatility of health care costs. If health care grows more slowly than projected, beneficiaries will be better off than if it grows as projected (but probably still worse off than under traditional Medicare); but if it grows faster than projected, they will be even worse off. In other words, we’ve taken the risk of health care inflation and transferred it to households. Cost certainty for the federal government sounds great, until you realize it is exactly balanced by uncertainty for real people.***
So let’s try to boil down the Medicare plan this way:
- If everyone buys the same health care they would otherwise, it makes us all worse off, because our bigger household deficits more than balance the smaller government deficit.
- People may buy less health care, but only because the poor will have to.
- On top of that, we’re shifting risk from the government to individual households.****
And remember, if Ryan’s magic “plan” for discretionary spending is to be believed, all of this is unnecessary.
There is really only one surprising thing about the Ryan plan: why is Social Security spared? The plan leaves Social Security benefits completely untouched while gutting Medicare and national defense at the same time (there’s no way we get non-entitlement spending down to 3.5 percent without slashing defense budgets). Social Security is widely believed to be considerably easier to fix than Medicare, and prominent Democrats like Peter Orszag have come up with their proposals.
The only answer I can come up with is that it’s pure politics: Ryan didn’t want to be seen as attacking both pillars of support for the elderly with one blow. Yet frankly I would rather see modifications in Social Security than in Medicare. With Social Security, lower benefits are bad, but they are predictable (and indexed to an appropriate index). With Medicare, beside the fact that vouchers will be capped below the rate of health care inflation, there are other major risks: the risk that the private insurance market will not develop affordable plans for seniors (look what a great job they’ve done with the non-employer market so far) and the risk that health care costs will grow even faster than projected.
Yet Ryan decided to go after Medicare. And, according to David Brooks, “His proposal will set the standard of seriousness for anybody who wants to play in this discussion.”
No. Seriousness means doing something about health care costs themselves — not transferring the fiscal problem to households. And while we may not all agree with the details, the Obama administration’s health care reform bill took a serious swipe at those costs. And the Ryan plan would largely cripple health care reform’s efforts to ensure universal, affordable coverage, mainly by eliminating the individual mandate and subsidies for poor people. Instead of being serious about health care costs, Ryan’s plan just tries to make them vanish, hoping we won’t realize that they’ll show up in our own household budgets.
But my daughter doesn’t believe in magic. And she’s only four years old. So neither should you.
* The drop from 12 percent is because 2010 government spending was high because of the stimulus bill.
** I’m referring to the extended baseline scenario, not the alternative scenario, which is more accurate in some ways. But I think this is appropriate here. The problem with the extended baseline scenario is that it is not politically feasible (i.e, we expect Congress to change current law because the extended baseline scenario is politically unpleasant). But the same problem applies to Ryan’s proposal.
*** I’m also not sure if the Ryan plan preserves insurance against poor health. I believe there is a prohibition against medical underwriting, a requirement that plans charge the same amount to all members, and a risk-spreading mechanism that shifts money between plans. These should limit cherry-picking, although obviously not as well as the current single payer system.
**** You could say that this is irrelevant because the government’s tax base is those same households, but you would be wrong. The government can shift burdens among income groups or even among generations to cope with sudden shocks (e.g., the post-World War II generations paid for World War II, and no one complained about that), while households can’t.