Shoven John B. - Putting our house in order: a guide to social security and health care reform

THIS BOOK GOT ITS START from a luncheon conversation. We talked about the sense of unease that characterizes much of the writing about the future of the American economy. The unease is produced by a feeling that the costs of entitlement programsSocial Security, Medicare, and Medicaidare out of control and will overwhelm the budget. That will bring a catastrophe for beneficiaries whose needs will not be served and for the fiscal stability of the United States. Something, we agreed, needs fixing so that people can be confident that reasonable benefits will be there for them and that the economy will remain healthy.

Anyone can see that the entitlement problems need to be solved. Is it possible? As we tackled this subject, we felt more and more convinced that the problems are soluble, at least in concept. Whether or not the political process can work out sensible changes is certainly an open question, but we are confident that progress can be made by reaffirming the wide consensus that present programs are not sustainable and by showing that there are workable alternatives.

We received a great deal of help in developing our ideas. We talked to colleagues and exploited their patience and goodwill, as well as their knowledge. Paul Berg, Michael Boskin, John Cogan, Victor Fuchs, Greg Rosston, and John Taylor read an early draft of the book and made comments that were very helpful. Vidar Jorgensen suggested materials in the health care area for us to consider. Susan Southworth has managed the manuscript through umpteen drafts with skill and care and has given us the benefit of her editing talent. Drake McFeely, with his editorial and organizational suggestions and his perspective derived from years of success in the publishing world, has been a masterful commentator.

We are deeply grateful for all this help. At the same time, if any reader has an argument, argue with us, not them.

THE UNITED STATES faces the daunting imperative of identifying solutions to manage the staggering projected costs of its Social Security, Medicaid, and Medicare systems, our so-called entitlement programs. The magnitude of these costs cannot be met by any reasonable projection of future federal government revenues. The U.S. body politic must somehow find a way to ensure that systems are in place to provide reasonable income for the elderly and universal access to health care that are consistent with fiscal sanity. The purpose of this book is to help find a way to make progress on this most important problem.

When Ben Bernanke, the chairman of the Federal Reserve Board, was asked by the Senate Budget Committee when the problems of Social Security, Medicare, and Medicaid would need to be addressed, he replied, I think the right time to start is about ten years ago.

Our approach differs from the theme of impending catastrophe in much of the current writing about the U.S. economy. Two recent publications tell the story in their titles: Running on Empty by Peter G. Peterson, and Is the United States Bankrupt? by Laurence J. Kotlikoff. And these projections reveal only part of the problems before us. Commitments by state and city governments and by private employers contribute substantially to the looming threat described in chapter 2, The Iceberg Ahead.

Clearly, something needs to be done, but this difficult subject merits a positive approach. Americas solid record of economic achievement holds the promise of continued success in a future filled with opportunity. American success exists on many fronts. The U.S. economy sets the world standard, and its growth is an essential ingredient in the expanding global economy. The creativity and dynamism of the American economy now yield strong gains in productivity (output per man-hour) that surpass the rate of improvement in many prior decades. The U.S. economy produces one of the highest per capita incomes in the world, and no other major developed country has been able to keep pace, let alone catch up. So its clear: We have success on our hands.

And the economy is by no means the only area of success. Not only do Americans live longer than ever before, but many are healthier and capable of being productive far longer than at any time in the past. These trends are likely to continue as a result of many breathtaking advances in science and technology. Such momentous developments are opportunities to nourish.

The contradiction between this clear evidence of success and the current atmosphere of unease in the United States calls for a change in mind-set. The projected gargantuan shortfalls in the U.S. budget stem largely from the interaction of constantly expanding costs of health care and longer life spans with relatively inflexible entitlement programs. Increasing longevity and better health are developments to celebrate. The challenge is to adapt income support and health care programs to these changing demographics and health care options.

The difficult problems of financing Social Security and health care commitments must be approached from a realistic perspective based on demography, medical developments, and fundamental economics. In demographic terms, we are retiring earlier and living longer. The result is a growing proportion of people outside the labor force compared with those who are working. Medical treatment options too have expanded. As a consequence, the federal government has increasingly become a mechanism for transferring ever-mounting sums of money from younger workers to older retired Americans.

Solutions to the entitlement problems will be made easier or more difficult according to the size and rate of growth of GDP, so the first step toward seizing opportunities is the promotion of a large, growing economy. That means examining those characteristics that strengthen the U.S. economy and addressing those that need to be stronger. Any reforms of entitlement programs should be consistent with these objectives. In addition, this book will look at ways in which the structure of retirement and health systems can be changed to improve participation in the labor force and to increase the rate of private saving. Labor and capital, after all, are the primary inputs that create GDP.

The history of Social Security and health care programs in the United States shows that their structural roots come from an altogether different era, that of the Great Depression and World War II and its aftermath. These programs must be adjusted to better accommodate increased longevity as well as improved and promising medical treatments, which are often costly.