Social Security, Medicare Face The Age Of Austerity In a country that seems headed toward austerity, what will become of the government's two keystone entitlements, Social Security and Medicare? The public trustees of the two programs, Charles Blahous and Robert Reischauer, say they're worried that the day of reckoning is here.
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Social Security, Medicare Face The Age Of Austerity

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Social Security, Medicare Face The Age Of Austerity

Social Security, Medicare Face The Age Of Austerity

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GUY RAZ, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Guy Raz.

This is the time of year when people in their late teens and early 20s get seasonal jobs in retail shops. And over the coming decades, all of them will be paying into the Social Security Trust Fund.

So we asked a few younger workers this question: Do you know when you'll start to see that money?

Unidentified Woman #1: I actually don't.

Unidentified Woman #2: Not off the top of my head.

Unidentified Man #1: Sixty-two and a half, I think, if they keep the current rules in effect.

Unidentified Woman #3: I thought that's what you get, like, when you pay into your pension, and then you get it back.

Unidentified Woman #4: The only thing I know, it's probably when you get really old.

(Soundbite of laughter)

RAZ: Well, that's only partially true because by the time most people in their 20s retire, the Social Security Trust Fund will be running out of money so fast, it's unlikely they'll collect anything close to what they put in. The money will start to run out in 2037, and it'll happen very quickly.

The same goes for the biggest part of Medicare. The Hospital Trust Fund runs out of cash by 2029 unless some big changes happen today.

And within 20 years, if nothing is done to curb the cost of Medicare, the U.S. will run annual deficits equivalent to 15 percent of our total economy. It could mean the government won't be able to pay for anything else except entitlements: not roads, not defense, not schools or national parks.

And it's why Alan Simpson and Erskine Bowles, the co-chairmen of President Obama's deficit commission, proposed a series of measures to address the problem.

Now, among those raising the loudest alarms are the public trustees of Social Security and Medicare. We'll talk with both of them this hour for our cover story today: How to fix the coming entitlement crisis.

And we begin with Charles Blahous. He spent most of his life studying the Social Security system. And he says the longer we wait to change the system, the higher the costs for all of us.

Mr. CHARLES BLAHOUS (U.S. Public Trustee, Social Security and Medicare): Walk through the thought experiment backwards. You find that there's a tremendous advantage to acting in the next few years because you can smooth out the changes so that any particular birth cohort, any particular income group is not going to feel the changes terribly acutely.

But because so many baby boomers are retiring over the next several years, every year that we wait, we're excluding millions of Americans from a solution.

RAZ: If the retirement age was raised to 70, it would save the U.S. government almost $250 billion by 2030. Obviously, the retirement age is not going to be raised for people who are eligible to receive it now or in five years or in 10 years or maybe even in 20 or 50 years. I mean, we're talking about a 75-year timeframe. Do you think that that is going to have to be the solution?

Mr. BLAHOUS: It is likely that it would have to be a part of the solution. In fact, if you look at the proposal that just came from the co-chairs of the president's commission.

RAZ: The deficit reduction commission, right.

Mr. BLAHOUS: They would implement a very gradual change in the retirement age. It currently will hit 67 in the mid-2020s. They would raise it gradually from 67 to 69 over the following 48 years.

Now, it's important to understand just how gradual that is. We had a retirement age increase in the last decade. It went up two months a year in the early part of last decade. And there was very little public recognition that it was happening at the time.

The retirement age increase that Simpson and Bowles have put forward is actually four times slower than that, starting a couple of decades from now. So even relative to what has already occurred, it's an extremely gradual change.

RAZ: President Obama, of course, worked on reforming the health care system. That was very controversial. The arguments he was making were based on future projections as well.

How do you make the case to the Congress to come up with a bipartisan plan to tackle this when the political payoff, at least in the short term, isn't there?

Mr. BLAHOUS: First of all, I think it's very important for people to understand the results don't come only in 2037. I mean, that's - we could make an incremental improvement in the outlook phased in over many, many years that would improve the overall stability of Social Security, improve everyone's ability to do retirement planning. So the benefits would accrue far earlier than 2037.

But getting back to your original point, I think, yes, you're right. One of the great difficulties is that the benefits of correcting the system are not felt until after the political action is taken to reform it. But what I would say to someone sitting in office now is that if you act today, you could fix the system without changing benefits for those in retirement, without raising taxes and without actually having benefits in the future that are lower than they are today.

Wait a few years, that's no longer true. Even if you phase in the changes very gradually, you either have to tell someone that their taxes are going up or that their standard of living is going down.

RAZ: In a nutshell, what do you think is going to have to happen specifically?

Mr. BLAHOUS: I think the next couple of months are actually very critical. The stars are never perfectly in alignment for Social Security reform. It's always tough. But we have had the co-chairs of the president's commission come forward with something, and we're in a very critical period where we're going to see how much support they get from the White House.

So over the next couple of months, I think we're going to learn a lot about where the president wants to go, how much he really wants a Social Security deal. If he really wants a Social Security deal, I do think it's achievable. The odds are always against it, but it's achievable.

RAZ: And it's going to have to come with some kind of combination of these recommendations from Bowles and Simpson: increase in retirement age, reduction in benefits, things like that?

Mr. BLAHOUS: Any solution is going to have to look roughly like what they did, maybe not exactly. You could push things in one direction or the other. But the broad shape of the solution is going to have to somewhat resemble what they've come up with, simply because that's the nature of the problem we're facing.

RAZ: Chuck, I'm looking at these projections. Okay, I'm in my mid-30s. I'll be eligible in 2036 for partial benefits, which is - I guess I'm just under the wire there.

Mr. BLAHOUS: Right.

RAZ: So should somebody like me have any faith in the system, you know, at all?

Mr. BLAHOUS: Well, I'm going to take the liberty of quoting someone who I think has said it very well, and that's David Walker. He says that if...

RAZ: Former head of the GAO.

Mr. BLAHOUS: Former head of GAO. He says that it's possible to do reform in a way that actually exceeds the expectations of different generations. A lot of younger people don't think they're going to get Social Security at all, but you could still collect three-quarters of your benefits over the long term even if we do nothing.

Now, that's a terrible outcome, but it's not zero.

RAZ: So effectively, the people in their 20s and 30s now are really the ones who are going to be affected by this.

Mr. BLAHOUS: That is a very important point. This is not about today's seniors. We're basically making decisions about the rate of growth of future benefits and the rate of growth of future tax burdens.

Unfortunately, a lot of our political discussion often is surrounded by scaring seniors. And seniors don't have to worry about this, at least not yet. I mean, in 2030, they have to worry about it. They don't have to worry about it yet. If we act now, we can tell seniors this is not going to affect you in any way.

RAZ: That's Charles Blahous, a public trustee for Social Security and Medicare. His new book on Social Security is called "The Unfinished Work."

Now, the other public trustee is Robert Reischauer. He once headed the Congressional Budget Office and now runs a think-tank, the Urban Institute. And he says the biggest problem with Medicare is its growth, 8 percent a year. And the economy just can't keep up with it.

For the time being, he says, the government can pay for it, but that window is closing fast.

Mr. ROBERT REISCHAUER (U.S. Public Trustee, Social Security and Medicare; President, Urban Institute): People don't relate to a crisis that's going to occur 20, 30 years from now.

RAZ: Right.

Mr. REISCHAUER: It's very hard. The public doesn't fully appreciate is a huge problem looms in the future. And if you start addressing it now, you can have very small, measured, phased-in adjustments that don't disrupt life.

RAZ: So what are the realistic options that are out there if you wanted to tackle long-term deficits and if you want to make sure that this system, this Medicare system, was solvent?

Mr. REISCHAUER: Well, to hold down the growth of medical costs across the board, what we have to do is incentivize providers, patients and payers to seek efficient, low-cost care.

RAZ: So how do you do that?

Mr. REISCHAUER: And that's very difficult to do. One step, which has been attractive to many policy analysts and many policymakers, is to reduce the subsidy that we provide through the tax system for employer-provided health care.

RAZ: In other words, people who are not on Medicare, people who are still working and get health care, they're not taxed on that. You're saying that if they were to be taxed on that...

Mr. REISCHAUER: That helps Medicare simply by making the whole system more cost-conscious. Right now, we're very ignorant of exactly the full costs of our health care or what impact it's having on us.

Most economists would argue if our health care costs rise at a slower rate, our wage increases will rise at a faster rate because what our employer cares about is total compensation. It doesn't care whether it comes in the form of premiums that he has to pay for health insurance or wages. And so there is a trade-off, but this trade-off is completely invisible to the average American worker.

RAZ: Robert Reischauer, you have seen presidents grapple with this issue, Medicare, since I guess your early days at the CBO in the 1970s, right?

Mr. REISCHAUER: Correct.

RAZ: Is there a time you remember when the country sort of had to focus on austerity as much as it may have to now?

Mr. REISCHAUER: No. I think we're in a deeper dish at this point and...

RAZ: Than you've ever seen.

Mr. REISCHAUER: Than I've ever seen, certainly. It's a combination of demography, bad economic situations and failure of our political system to address problems in a proactive way.

RAZ: Let's talk about some of the proposals that are floating around Washington now about how to reduce the long-term deficit because, as you know, by 2030, the government projects that it will run deficits up to 15 percent, equivalent to 15 percent of GDP. The president has appointed a debt commission. What do you make of the proposal that was floated by the chairmen of that commission, Alan Simpson and Erskine Bowles?

Mr. REISCHAUER: I think it was tactically and strategically brilliant that they put forward a chairmen's mark. It was a loud and clear signal to meet the aspirations of all those who want to reduce the size of government, balance the budget, reduce the debt. It sent a clear notification out that we're going to have to sacrifice a lot of sacred cows. And...

RAZ: I mean, they're talking about raising the eligibility rate. They're talking about capping growth for both Medicare and Medicaid, increasing premiums...

Mr. REISCHAUER: The proposal that they put forward has a lot of radical ideas in it, ones that will be very difficult to gain any support in Congress. But it put a proposal on the table so that those who criticized would have to come with alternative proposals that saved at least as much money.

RAZ: That's former Congressional Budget Office director Robert Reischauer. He's also a trustee for Medicare and Social Security and the president of the Urban Institute here in Washington.

Robert Reischauer, thank you.

Mr. REISCHAUER: It was a pleasure.

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