Cutting right to the chase, the cliff is almost upon us, and deciding big changes in social insurance programs—Medicare and Social Security, in particular—in this climate makes no sense. That includes both raising the Medicare eligibility age and the move to a chained CPI, which by dint of growing more slowly, would reduce Social Security benefits (and increase tax revenues…see here).
–That doesn’t mean some changes, including cuts, shouldn’t be part of the cliff negotiations. The President’s team, I think, could bring to the table around $400 billion in Medicare cuts over 10 years that largely come out of more efficient drug purchasing, other delivery side savings (paying for quality over quantity), and increase premiums on higher income seniors. Those look to me like smart savings and important negotiating material.
–But bigger, structural changes, like raising the Medicare eligibility age or switching to the chained CPI are more complex and deserve more discussion and debate.
–Increasing the eligibility age for Medicare saves money for the budget. But that’s no great policy feat–just kick some people off the rolls and boom, you’ve got some savings. In fact, it raises costs for the larger system (see here), while potentially leaving 65-66 year olds with a less access to affordable coverage. That’s not “reform”—it’s a short-sighted attack on a critical, highly efficient program motivated not by efficiency, but by antipathy to social insurance.
–The chained CPI switch makes more substantive sense, but it’s by no means a simple call. It’s a more accurate price index, but it would constitute a benefit cut, and one that would really accumulate for older seniors. For this reason, my CBPP colleagues (see first link above) argue for a benefit bump-up in the program for the older elderly. I think it’s very unlikely that we can make that part of the negotiations over the next few weeks. If there’s a part two to all of this that involves real tax and entitlement reform discussions next year, that’s the time to be getting into such significant structural changes.
–Some advocates for retirees have suggested that if the goal is to switch Social Security to a more accurate price index, we should consider the CPI-E (“E” is for an experimental index for the elderly). This makes sense because the elderly really do face a different consumption market basket than the rest of us, with larger expenditure shares on medical care and housing, and less on, say, work-related costs, like transportation (see figure below).
–The problem is that the ‘E’ index is not computed as accurately as it should be, but the BLS could whip it into shape if Congress would provide the resources (I don’t know how much, but a) we’re talking millions not billions, and b) it would pay for itself pretty quickly—the main problem is the sample of goods and their weights are not representative of the elderly’s expenditures).
–So, a smart way to go here is to pay the BLS to derive a more accurate price index for the elderly and then chain weight it.
Then, when we’re not under the pressure of a cliff-like deadline, we can consider whether some of these policy changes make sense. To do so over the next couple of weeks would be extremely misguided with potentially large and long-term negative consequences.
Source: Stewart, 2008