Rethinking Social Insurance

The single greatest threat to the fiscal health of the United States is the runaway growth of the nation’s major retirement and health care entitlement programs. Social Security and Medicare are projected to grow from 7.5 percent of GDP today to almost 13 percent of GDP by 2030. Already, the two programs consume over a third of the federal budget. The total present value of costs that will exceed earmarked revenues of Social Security and Medicare over the next 75 years is $41 trillion, or, as the Government Accountability Office points out, a debt burden of $135,000 for every man, woman, and child in America. If nothing is done to check the growth of spending on social insurance, federal spending as a share of the economy will increase by half, from about 20 percent to almost 30 percent, over the next 30 years.

Meanwhile, absent a significant rise in revenue beyond the historical level of GDP, spending on Social Security, Medicare, and interest on the debt could squeeze out all other areas of the budget. Taxes could, in principle, be increased to cover these costs, but the unprecedented tax levels required would have an extremely negative impact on employment, wage growth, and our ability to compete internationally. Borrowing to pay for the programs, on the other hand, would lead to such high deficits that the debt would be unsustainable.

Social Security and Medicare are universal in design. That is, nearly all Americans participate in the programs, with workers financing them and retirees at all income levels collecting benefits. Their universality enhances their popularity, but it also means that resources are directed to the affluent, leaving less than is adequate for those in need. Bill Gates will qualify for subsidized benefits under Medicare, while other future retirees will be unable to afford the program’s deductibles and co-payments. Meanwhile, tens of millions of workers today go without any health insurance at all.

Given the fiscal imbalances caused by Social Security and Medicare, we will have to make some major changes in our social insurance system if we are to address other pressing needs. Mandating giant tax increases or gutting spending in other areas are not viable options. Moreover, our economy has undergone vast changes since these programs were designed. A fundamental redesign of our social insurance programs is necessary if we are to deal successfully and fairly with the new economic conditions, risks, and opportunities we face.

We recommend that Americans, to the extent that they can reasonably be expected to do so, be obligated to save for an adequate level of retirement and insure themselves against ordinary risks, with three caveats. First, if needed, individuals should receive help in meeting the costs of such an obligation through tax relief and/or direct financial assistance. Second, government should help to spread large insurance risks widely so that insurance would be practical and affordable. Finally, existing social insurance programs should be revamped to provide a strong safety net... 

For the full text of Bulter and MacGuineas' paper, please see the PDF attached below.

Click here for a statement from New America's Health Policy Program in response to ideas raised in this paper.