Entitlements: Time running out on Social Security, Medicare fixes

WASHINGTON — Social Security and Medicare long have been considered the nation's fiscal time bombs, and the ticking is getting louder. But presidential candidates Barack Obama and John McCain have no comprehensive plans to overhaul the systems, and are campaigning almost as if they don't notice them.

Medicare faces insolvency by 2019. Social Security is projected to be spending more than it's collecting in taxes by 2017.

Yet both Obama and McCain offer only minor fixes — and few specifics even about the modest ideas they do float.

Bigger, bolder, more sweeping approaches are needed, and fast, say the experts.

"They're not preparing the country for sacrifice," said Robert Bixby, the executive director of the Concord Coalition, a nonpartisan budget watchdog group.

The candidates insist that they're aware of the problem's gravity. At Tuesday's debate, they were asked which of three big problems would be their highest priority: health care, energy or reform of the entitlement programs Social Security, Medicare and Medicaid.

McCain said he'd work on all three at once, while Obama cited energy first, health care second — and education third. He didn't mention entitlement reform.

Time works against both candidates.

Beginning in 2011, the first wave of baby boomers — Americans born between 1946 and 1964 — will reach official retirement age. From that point forward, the federal government's finances will be strained, as more and more Americans retire expecting a shrinking number of active workers to pay their promised health and pension benefits.

To put it more starkly: Medicare's trustees project the hospital insurance fund will become insolvent in about 10 years, as its expenditures grow at a 7.4 percent annual rate. The government, the trustees said, will need $342 billion to cover insurance costs during that period.

Social Security is in better shape, but has its own daunting challenges. While it isn't projected to exhaust its resources until 2041, its tax revenue is expected to fall behind outlays beginning in 2017, the trustees said.

The next president will be under pressure to stabilize funding for the two programs.

"The longer action on reforming health care and Social Security is delayed, the more painful and difficult the choices will become," said a Government Accountability Office study in June. "The federal government faces increasing pressures, yet a shrinking window of opportunity for phasing in adjustments."

Medicare, the report said, "represents a much larger, faster-growing and more immediate problem than Social Security."

A series of factors are driving up Medicare costs. According to the GAO and the trustees, medical technology is often overused; the health-care market doesn't operate on a supply-and-demand basis as people often don't shop for the lowest price; and chronic health problems — such as obesity or substance abuse — require expensive, lengthy treatment.

McCain's plans for Medicare are part of his overall health care initiative. He'd offer tax credits of up to $2,500 to individuals and $5,000 to families to help offset the cost of health insurance. Premiums for employer-sponsored health care average $12,680 this year, and employees contribute $3,354, according to a Kaiser Family Foundation survey.

McCain said he'd pay for the tax credits with unspecified cuts in Medicare and Medicaid, the state-federal health program for the poor and disabled. The Urban Institute-Brookings Institution Tax Policy Center estimates that McCain's proposed tax cuts would cost the Treasury $1.3 trillion over 10 years. The Arizona senator hasn't detailed how he'd cut that much from Medicare and Medicaid.

"We should avoid across-the-board cuts or other cuts to Medicare and Medicaid that could reduce benefits for the millions of older Americans, low-income families and people with disabilities who rely on these critical health and long-term care benefits," said Drew Nannis, a spokesman for AARP, the powerful lobby for seniors.

McCain vows to "reform the payment systems" in the two programs "to compensate providers for diagnosis, prevention and care coordination." He'd give states more flexibility to experiment in managing Medicaid costs, and make it easier for consumers to get data about costs and physician quality.

McCain would also create a commission to recommend changes.

Obama's plans are similarly vague.

He pledges to "reduce waste in the Medicare system, including eliminating subsidies to the private insurance Medicare Advantage program, and tackle fundamental health care reform to improve the quality and efficiency of our healthcare system."

Obama also backs closing the "doughnut hole" in the Medicare prescription drug program. The standard drug benefit includes a $275 deductible and 25 percent coinsurance up to the first $2,510 of prescription costs. Then beneficiaries get no coverage for their next $3,216 in costs. After that, they pay 5 percent of their drug costs.

Analysts find both plans too vague and to small to address Medicare's larger trouble.

"Neither Obama nor McCain has outlined in any great detail any kind of structure change in Medicare," said Robert Moffit, director of the Heritage Foundation Center for Health Policy Studies.

"The only thing McCain does is talk about the importance of pay-for-performance, and that will get some savings, but neither he nor Obama has articulated any kind of detailed comprehensive change."

McCain opposes the generous but expensive Medicare prescription drug program. He favors making the Part D drug benefits available only to the needy. AARP disagrees.

"Some specific proposals, such as those to income-relate Part D premiums, do nothing to address the broader problem of rising health care costs. Increasing premiums simply shifts additional costs onto people in Medicare," said AARP's Nannis. "Instead, our priority should be to bring down prescription drug and health care costs throughout the health care system."

The differences between the candidates are starker on Social Security, yet solutions are regarded as somewhat easier to implement.

David Walker, former Comptroller General and now president of the Peterson Foundation, a nonpartisan budget research group, called a fix "easy." Former Federal Reserve Board Vice Chairman Alice Rivlin sees consensus forming around several solutions, notably raising the retirement age and increasing the income limit subject to the Social Security wage tax. Currently, Social Security taxes are collected on only the first $102,000 of income.

The candidates, though, aren't talking about those steps.

McCain in the past has been sympathetic to private savings accounts, saying he "supports supplementing the current Social Security system with personal accounts — but not as a substitute for addressing benefit promises that cannot be kept."

With the recent stock-market swoon, personal accounts invested in stocks and bonds are a hard sell.

McCain has ruled out any new Social Security taxes, while Obama has expressed interest in boosting the cap by 2 percentage points to 4 percentage points for workers earning more than $250,000. The current 12.4 percent payroll tax that goes into Social Security is split between employer and employee.

The usual Washington way of making such unpopular changes is to have a bipartisan commission make recommendations, a method used successfully in 1983. The result raised Social Security taxes and trimmed benefits, and the system's solvency was significantly strengthened.

Many analysts believe that a commission is a viable idea. "A lot of members of Congress are ready to work together on this, but they have to be assured no one is going to try to double cross the other person," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

But Brian Riedl, senior policy analyst at Washington's Heritage Foundation, a conservative research group, was less optimistic.

"There's a bias in Congress against creating commissions. Members feel they're usurping their authority," Riedl said.


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