Washington frets endlessly over the problems that Social Security and Medicare, both of which are projected to exhaust their trust funds in the coming decades, might cause the budget. But two new reports underscore the serious problems they might solve for the country.
Take Social Security. For years, pension experts have spoken of the “three-legged stool” of retirement savings: Social Security, employer pensions and private savings. In recent years, however, that stool has begun to wobble, and today, Social Security is basically the only leg holding it up.
In 1980, about 40 percent of private-sector workers had a guaranteed pension. By 2006, that had fallen to 15 percent. Today, the 401(k) reigns supreme, with a trajectory that is almost the precise reverse of guaranteed pensions: In 1979, 17 percent of workers had a 401(k). Today, 42 percent do.
Those 401(k)s, however, are woefully underfunded. In 2010, 75 percent of workers nearing retirement had less than $30,000 in their 401(k). Sixty percent of low-income households are at risk of being unable to maintain their already modest living standards in retirement.
Individual savings don’t look much better. About a third of households don’t have a savings account at all. More than 40 percent don’t have enough to cover basic expenses if they lost their main source of income. In a vicious cycle, the need for savings is so great that many workers are tapping into their 401(k)s early: In 2010, contributions to defined-contribution pensions totaled $176 billion, while early withdrawals — which carry heavy penalties — totaled $60 billion.
Today, Social Security provides 37 percent of the income for all Americans over 65, and about 80 percent of the income for seniors in the bottom half of the income distribution. Given the state of private and employer pensions, those numbers will have to rise in the coming years, or else the standard of living for seniors will fall.
This is the other, perhaps more pressing, Social Security crisis: It’s not generous enough to counteract the sorry state of retirement savings nationwide. In a report for the New American Foundation, Michael Lind, Steven Hill, Robert Hiltonsmith and Joshua Freedman survey this data and conclude that the ongoing debate over how to cut Social Security is all wrong: We need to make Social Security much more generous.
They would keep today’s income-based Social Security program, but add a “Part B,” which would be a flat payout to all retirees. When parts A and B are combined, all retirees would be guaranteed 60 percent of their average working wage in retirement, with low earners seeing closer to 100 percent replacement. Part B would be pricey, adding almost a trillion dollars to Social Security’s costs in 2037, and the authors don’t have a clear proposal, much less a politically realistic plan, for how to pay for it. But not paying for it doesn’t mean those costs disappear: It either means living standards for seniors will tumble, or families will strain as they try to support older relatives.
Medicare, too, can help solve some of our tougher health-care problems. A key fact — perhaps the key fact — about American health care is that the prices we pay for the health care we consume are far, far higher than in any other country.
According to new data from the International Federation of Health Plans, an angiogram costs $218 in Switzerland, but $914 in America. Bypass surgery is $22,844 in France, but $73,420 in the United States. A hip replacement runs you $11,889 in Britain, but $40,364 in the U.S. “Other countries negotiate very aggressively with the providers and set rates that are much lower than we do,” says Gerard Anderson, director of the Center for Hospital and Finance Management at Johns Hopkins.
But not all American payers are the same. Medicare uses its massive market power to negotiate much lower prices than private insurers. For that reason, the Congressional Budget Office estimated in 2011 that “average spending in traditional Medicare will be 89 percent of (that is, 11 percent less than) the spending that would occur if that same package of benefits was purchased from a private insurer.” Back during the health-care debate, the CBO estimated that a public option able to use Medicare’s pricing power could save more than $100 billion over 10 years.
In a policy paper for the Robert Woods Johnson Foundation, Robert Berenson, John Holahan and Stephen Zuckerman propose a package of changes that would save more than $700 billion over 10 years. One of the changes they propose is raising the age of eligibility from 65 to 67. But in order to blunt the impact of that change, they propose letting people between the ages of 65 and 67 buy in to Medicare on their own — that way, they can take advantage of Medicare’s lower prices, even if they’re paying for them out-of-pocket. “Buying into Medicare gives them as good a deal as they’re going to get,” Berenson says.
If it’s such a good deal for the 65-to-67 crowd, then why not let 55-year-olds buy into Medicare, or even let everybody buy into Medicare? “I’ve always assumed it was just political opposition from Republicans,” Berenson replied. I asked him to put aside the politics and just assess whether it would work. “Conceptually, I don’t see a problem,” he said.
It has become common in Washington for wonks and politicians alike to lament the public’s resistance to cutting Medicare and Social Security. But that resistance is there for a reason: These programs work extraordinarily well. Social Security has been wildly successful at raising living standards for the elderly, even as other forms of retirement savings have grown shakier. Medicare is cheaper than private health insurance, and has seen its costs grow more slowly, to boot. We’ve gotten so used to thinking of our entitlement programs as problems to be solved, we’re missing all the problems they can solve.