A Few Proposals For Reforming Entitlement Programs

A recent report from the Business Roundtable (BRT) outlines their proposal to reform Social Security and Medicare with the goal of maintaining an effective and efficient social safety net for future generations while addressing our long-term fiscal imbalance.

On Social Security, the report notes that the Disability Insurance trust fund is projected to be exhausted in 2016, while the overall trust fund is projected to be exhausted in 2037. BRT's proposal seeks to address the solvency issue without touching benefits for people currently over age 55. They propose:

  • Increasing the normal retirement age from 67 to 70
  • Increasing the progressivity of benefits by instituting a new minimum benefit for "full-career" workers and by means-testing eligibility
  • Switching to the chained CPI for calculating the cost of living adjustments (COLAs)
  • Including newly hired state and local workers in Social Security
  • Encouraging more private savings by strengthening retirement saving incentives

CRFB has made the case for the need to switch to the chained CPI for COLAs since it better accounts for consumer substitution, and we have also discussed raising the Social Security age as an option previously.

In the second half of the report, BRT focuses on the future of Medicare spending:

The April 2012 Status of the Social Security and Medicare Programs Trustee Report confirmed that the Medicare HI Trust fund (Part A) faces depletion in 2024, earlier than the combined Social Security Trust Funds. Medicare costs will grow substantially from approximately 3.7 percent of the GDP in 2011 to 5.7 percent of GDP by 2035. Medicare spending will jump from $560 billion in 2012 to $1.0041 trillion in 2022. The number of beneficiaries enrolled has doubled in the past 35 years and are expected to double again in the next 35 years. The average Medicare enrollee cost in 2011 was $12,042.

Similar to their Social Security proposal, their plan for slowing Medicare spending would not affect people over age 55. The proposal involves:

  • Increasing the Medicare eligibility age to 70
  • Allowing private plans to compete with Medicare
  • Exploring "other types of means-testing" Medicare beyond income-related premiums
  • Maintaining current financial support for low-income beneficiaries

In a related development, a number of House Democrats introduced The Public Option Deficit Reduction Act (H.R. 261). The bill would, as its name indicates, establish a government-run health insurance plan to compete with private insurance in the new health exchanges. Since the public option's premiums are projected to be 5 to 7 percent lower than private health insurance, the proposal would save $88 billion through 2021, according to a CBO estimate from March 2011.

Given the indisputable fact that entitlement spending and health care costs in particular are the main drivers of the deficit, any serious deficit-reduction strategy must address these programs. Thus, it is promising to see national and business leaders bring ideas to the table on how to get spending in these programs under control. Proposals like these might generate heated debates, but they are a healthy start to negotiating a bipartisan deal.

The full Business Roundtable report can be found here, and the full text of H.R. 261 can be found here.