"Every Confidence My Generation will Fail"

A reduction in government spending does not necessarily imply a reduction in services.  Contracting with private sector providers has reduced government expenditures for some services, and increased user fees transfer a portion of the cost of services from the tax ledger to those who use the services.  Before reducing or eliminating valued government services, we should make sure they are being produced and financed in the most efficient manner possible.

But let’s suppose that all those efficiency-enhancing steps have been taken.  Now what would I give up?  Any meaningful answer must confront the big-ticket items: tax expenditures, defense spending, and entitlements. 

Tax Expenditures.  I would be willing to give up the tax deductibility of “employer-paid” health insurance premiums (a misnomer, because I really pay the whole premium through forgone wages) as well as the tax deductibility of employee-paid premiums.  John McCain proposed taxing health insurance premiums but giving everyone (including those who don’t pay taxes) a refundable tax credit to purchase health insurance. Presidential candidate Barack Obama expressed astonishment and vilified McCain.  Once elected, President Obama signed into law the “Cadillac tax” on high cost health plans. 

Second, I would give up the tax deductibility of home mortgage interest.  I would not give up these tax breaks grudgingly, but enthusiastically, as they are economically inefficient price distortions and of far greater benefit to the wealthy than to the poor.  We must move towards a flatter tax structure that ends government subsidies for people who aren’t poor and gets the government out of the business of picking winning and losing industries in the economy.

Defense Spending.  I would happily give up whatever it is we’re doing in Libya.  I understood the rationale for invading Iraq and Afghanistan, but I have no idea why we’re in the middle of a Libyan civil war.  Illiteracy, poverty, the subjugation of women, tyrannical rule and internecine slaughter in the Muslim world are not problems that the U.S. government is well-positioned to solve.  It’s difficult to enjoy the fruits of Western civilization if you reject the foundation of Western civilization.

Entitlements.  Medicare is the Leviathan on the ledger, and I am willing to give up my entitlement to Medicare in its current form.  This is not really a choice; it is a necessity. 

Despite my significant contributions to Medicare through payroll and income taxes, analysts at the Urban Institute have estimated that I will withdraw about $150,000 (in 2004 dollars) more from Medicare than I will have paid in during my working life.  Of course, part of my contributions has gone to pay for my parents’ and grandparents’ Medicare expenses and part of the next generation’s contribution will contribute to my expenses.  The question is, “How much?”

The number of workers per beneficiary is falling dramatically, and there will be a sudden drop in payroll and income tax revenue when my generation retires.  As a result, one or more of the following will (not might) happen.  Part A of Medicare (that pays hospitals) will become insolvent.  Medicare and Social Security will crowd out virtually all other discretionary federal spending.  The government will default on its debt or print more money (leading to inflation that will fall most heavily on the poor, including the elderly poor), or the federal debt will increase sharply, leading to greater dependency on foreign creditors and intolerable tax rates on our children.  Medicare will be forced to become more efficient, and benefits to my generation will be reduced.  I favor the latter. 

There are many ways to reduce Medicare spending without harming anyone.  Medicare combines two entitlements—first to an antiquated benefit package and second to an antiquated open-ended fee-for-service (FFS) delivery system that is all but extinct in the commercial insurance sector, where inefficient health benefits translate directly into lower wages.  We must redesign Medicare’s benefit package and drop the open-ended entitlement to FFS Medicare.

First, traditional FFS Medicare should be converted into a quality- and price-based preferred-provider organization in which beneficiaries face the full marginal cost of providers who want to charge higher fees and prescribe services that provide no medical benefit.  Medigap policies should not be allowed to cover that additional marginal cost.  Second, the government’s contribution to premiums should be set equal to the lowest bid for the entitlement benefit package by any qualified health plan in each county, whether a private plan or traditional fee-for-service Medicare.  Democrats rightly objected to overpaying private plans in market areas where FFS Medicare was less expensive.  Republicans should congratulate them on their zeal for efficiency and point out that the same logic applies to overpaying FFS Medicare in market areas like Miami where private plans are less expensive.

Payroll and income tax rates as they apply to Medicare funding should be held constant for our children at the same rates we paid, and the proportion of Medicare expenses that can come from general tax revenue (the “45 percent” rule) should be strictly enforced.  That will fix the amount of revenue per taxpayer that our children will have to contribute to my generation’s Medicare expenses.  I should have to live within that revenue limit, plus my own resources.  Truly destitute people of my generation (not those who have managed to hide their assets) should receive help with their Medicare expenses, but our children should face the same tax rates we faced and not a penny more.  It’s not our kids’ fault that we produced fewer kids per family than our parents’ generation. 

To date, Congressman Paul Ryan’s proposal is the only serious attempt to address the Medicare problem, and his proposal has much to recommend it, but it contains one fatal flaw: It lets my generation off the hook.  Ryan’s Medicare reforms apply only to people now 55 and under.  Fairness requires sacrifice on everyone’s part.

So essentially it all comes down to ending government assistance for people who are not poor and making some careful choices in defense spending.  Do we have the political will to make tough choices?  I have every confidence that my generation will fail to do the right thing.  Personal responsibility has not been one of our strong points.  Therefore, it will be up to the next generation to out-vote us.  You can be assured of my full support.   

Bryan Dowd is a professor in the Division of Health Policy and Management in the School of Public Health at the University of Minnesota.