by Bill Clinton
A. Cutting Spending
When I was growing up, most everyone I knew was familiar with a wisecrack attributed to the famous bank robber Willie Sutton. When asked why he robbed banks, he replied, “Because that’s where the money is.”
In the federal budget, as mentioned earlier, the money is in Medicare, Medicaid, Social Security, the military, and interest on the debt. The only thing we can do about interest payments is to reduce our debt as a percentage of national income by growing the economy and cutting the deficit. In times of normal economic activity, the budget should be balanced or, if we want to pay the debt down to increase America’s economic independence, in surplus. During recessions, deficits are almost inevitable because government income drops and, even if there’s no stimulus program, spending goes up because so many people need help just to survive. Remember, in this recession as many as 15 percent of Americans have qualified for and used food stamps.
As for the defense budget, you can expect military spending, including spending on private contractors, to drop as the wars in Afghanistan and Iraq wind down. To their credit, congressional Republicans have altered their original “no defense cuts” position and agreed to the Pentagon’s request to eliminate a contract to build backup engines for the new Joint Strike Fighter because the plane’s manufacturer can build all the engines needed. Bipartisan support for this cut will save up to $3 billion. The Pentagon, including the Marine Corps, also wants to cancel the proposed amphibious Expeditionary Fighting Vehicle, which the corps says it doesn’t need, at a savings of $9 to $10 billion. It is questionable whether we still need eleven aircraft carrier battle groups, given the likely deployments of the next several years and the fact that no other navy has more than two. The elimination of even one would save $11 billion.
THE TRICARE HEALTH PLAN, AVAILABLE TO all veterans, has a very modest enrollment fee with modest co-pays and no deductibles.3 We could switch to a sliding scale based on income and raise a fair amount of money, as long as we do it without putting more burdens on veterans returning from combat with bleak job prospects or disability conditions, including post-traumatic stress disorder and other wounds sustained in service to our nation. The unemployment rate for veterans exceeds 12 percent, 25 percent above our national rate of 9 percent, and more than 200,000 veterans have head injuries, mostly from exposure to IEDs, the improvised explosive devices commonly called roadside bombs.
While defense spending can and should come down—we spend about as much as all other nations combined—we have to be careful how, when, and how much we cut it. We have to maintain enough personnel to deal with future conflicts and emergencies, without the terrible toll multiple deployments to combat zones with limited breaks in between took on military families when deployments in Iraq and Afghanistan were both at their high-water mark. We have a lot of old military equipment that has to be repaired or replaced after years of heavy use. And we don’t want to cut the advanced research budget that gave us the drones, first for intelligence during my administration and then, during Presidents Bush’s and Obama’s terms, for surgical strikes. And we can’t forget that a lot of military research eventually winds up producing applications for our civilian economy, creating new businesses and good jobs.
One of the most interesting examples of the interaction between military investments and growth in the economy can be found in Orlando, Florida. For decades the military, defense contractors, and NASA have had major operations in or near Orlando. It’s also the home of Disney’s and Universal’s theme parks and the branch of Electronic Arts that develops sports video games. The University of Central Florida, with more than fifty thousand students, designs programs and projects to serve the needs of both the defense and the entertainment operations and to support the creation and success of the new companies and good jobs that can thrive in this environment. More than one hundred companies, from the very small to the very large, have located in Orlando to do sophisticated simulation work. Simulation helps the military to train personnel, Disney and Universal to provide exciting realistic attractions, and Electronic Arts to design engrossing video games. The military invests $5 billion a year in Orlando, money it would spend on training, information technology, and targeting systems anyway. This way, it gets better results faster and grows the economy.4
NOW LET’S LOOK AT SOCIAL SECURITY. Is it broke? Technically, no, but there is a cash-flow problem. It’s important to understand this so we can make the right decisions about what to do.
About 60 percent of Social Security’s fifty-four million beneficiaries are eligible for the benefits based on their age; the rest are disabled or dependents and survivors of retired workers. Almost all workers pay 6.2 percent of wages into the system, as do their employers. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced 2011 Social Security tax rates for employees to 4.2 percent. This tax rate is currently set to return to 6.2 beginning in 2012. Benefits are progressive, in that lower-income workers receive a higher percentage of their working income in benefits than higher-income workers do. Taxes are collected on earnings up to $106,800. Those who earn more pay no Social Security taxes on the amount above that.
Social Security is a pay-as-you-go system. Until 2010, revenues collected were greater than the cost of benefits. So Social Security lent the surplus revenue to the federal government in return for Treasury Department securities worth the same amount, plus interest. The value of the Treasury bonds is more than $2.5 trillion. The interest earnings of the trust fund are greater than this year’s payout, but those earnings also are paid in more bonds, not cash.
Because it is not paid in cash, the Social Security fund is nowhere near broke, yet it has begun to run a cash-flow deficit, $45 billion in 2011. That means that this year beneficiaries’ checks will be funded in part from money borrowed from U.S. and overseas buyers of our bonds. The amount we borrow will continue to grow as the baby boomers move into retirement age, unless the rest of the government begins to operate with a surplus sufficient to cover Social Security’s outlays or slows the projected increase in the program’s cost.5
Social Security’s current cash shortfall and future problems are the result of a number of factors. First, over the next eighteen years, baby boomers, born between 1946 and 1964, will turn sixty-five. We are too large a group for those in the workforce to support at present tax and benefit levels. In 1960, there were 5 workers per beneficiary. Today the ratio is 3 to 1. By 2025, there will be just 2.3 workers paying into Social Security for each beneficiary. Thankfully, the generation called the millennials is more populous than the baby boomers. As they enter the workforce and we boomers pass away, the United States will get back to a more stable worker-to-retiree ratio.
Meanwhile, we have to figure out what to do for the next thirty-five to forty years, especially since seniors are living longer, and therefore will draw more benefits than previous generations. When Social Security was inaugurated, average life expectancy was slightly below the age at which benefits began. Today, older Americans have a considerably longer life expectancy. American men who reach age sixty-five have a life expectancy of eighty-two. For women, it’s eighty-four. It’s a good problem to have, one I’m trying to acquire myself, but it increases the cost of Social Security.
Not long ago, the age for receiving full benefits began to be raised two months each year, until it reaches sixty-seven in 2027. That will take some pressure off, but it won’t solve the problem. The Simpson-Bowles Commission thinks that over time we should gradually raise the eligibility age to sixty-nine, at least for people who don’t have strenuous jobs. The commission also advocates changing the way we calculate annual cost-of-living increases in Social Security payments, because the formula now used actually increases payments more than seniors’ living expenses go up. If we do lower the rate of benefit increases, provision will have to be made for older people of modest means who have health-related costs not fully covered by Medicare, or Medicaid if they qual
ify for that too.
The second challenge facing Social Security is that even though 90 percent of workers pay into the system, the percentage of earned income subject to the tax has dropped from its historical average of 90 percent to 86 percent, as more and more of the income gains for the last thirty years have gone to higher-income Americans. The maximum wage cap, now $106,800, has not increased as much as wages above the cap. According to the best available estimates, by 2020, when the cap is scheduled to be $168,000, only 83 percent of wages will be covered. Since 1980, the only time when the incomes of those in the lowest 20 percent of earners rose as much, in percentage terms, as the highest 20 percent was in the four years of my second term, thanks to a tight job market and more support for working families. Even then, the largest gains were concentrated in the top 10 percent and especially in the top 1 percent. Rising inequality is causing Social Security problems.
That’s why the Simpson-Bowles Commission recommended raising the cap to $190,000 in 2020 and returning to 90 percent coverage by 2050. If we adopt that approach, the highest-income Americans, who were the biggest winners in the last decade’s wage growth and tax cuts, still won’t make much of a contribution to solving the problem. Some experts have suggested that a better, fairer way to raise more money is to impose a surcharge of 1 to 1.5 percent on all earnings above the cap for employers and employees.
There have been a number of Social Security reform proposals that would make the system solvent for seventy-five years, by raising the retirement age and the earnings cap, reducing the role of automatic benefit increases, and actually increasing payments to the neediest, most vulnerable beneficiaries. The Simpson-Bowles Commission plan does that. You might also want to check out the ideas of President Obama’s former Office of Management and Budget director Peter Orszag and his colleague Peter Diamond, and those of Bob Pozen, who was a member of President Bush’s Social Security reform commission.6
The only sacrifice-free option that would ease but not solve the problem is to add more people to the workforce to increase monthly Social Security tax payments. The three large pools of potential new workers are seniors themselves, people with disabilities who can work, and new immigrants. In the late 1990s, I signed two bills that I hoped would encourage more workforce participation. One allowed seniors to enter the workforce without having their own Social Security payments reduced, but they would still pay income and payroll taxes on new earnings. The other allowed people with disabilities to enter the workforce without losing their Medicaid benefits. Previously, when disabled people had to give up Medicaid coverage if they took a job, very few of them could afford to work because their annual health-care costs are often greater than any salary they could earn, and they are uninsurable under employer-provided policies. Now disabled Americans can enter the workforce and contribute payroll taxes to the Social Security fund.
Both Presidents Bush and Obama tried to reform our immigration laws to legalize more immigrants whose earnings would contribute to the Social Security fund. As long as we have a shortage of Americans trained in science, math, and high-tech fields, just increasing the number of well-educated immigrants under the H-1B visa program would help cutting-edge companies grow and add new employees who are American citizens to their workforce. The Obama administration announced a change in immigration policy in August 2011 that is a step in the right direction. Previously, immigrants with special skills, mostly in technology, had to have a specific job offer to get a visa. Now they are eligible if they commit to starting a new business. When they do, they and their employees will pay Social Security taxes.
Of course, these proposals are academic as long as the United States is creating so few jobs, but they’re worth keeping in mind when the economy gets going again, because we need to make some changes in Social Security, and more people contributing to the system means lower burdens in future tax and benefit changes for everyone else.
The long-term health of Social Security is very important. Though most seniors have other sources of income, almost half of them would fall below the poverty line without their monthly Social Security checks. Because everyone recognizes that Social Security has a cash-flow problem, that costs are rising as the number of seniors increases, and that the available options to fix the problem are not too draconian, even the AARP has indicated a willingness to negotiate a long-term solution. If we did, it could reduce the debt by $200 billion or more over ten years.7
EVEN WITH SUBSTANTIAL REDUCTIONS below future projections in nondefense discretionary spending, and savings in the military budget and Social Security, we still won’t be able to balance the budget, because of the growth of health-care spending, led by Medicare and Medicaid, but including the Children’s Health Insurance Program, the Federal Employees Health Benefits Program, the VA system, and the TRICARE system for veterans. Since 1981, overall health-care costs have increased at three times the rate of inflation, although during the 1990s, the spread of managed care and the spotlight the health-care reform effort put on excessive costs kept increases closer to the overall rate of inflation. The cost restraints and the Children’s Health Insurance Program, enacted in 1999, led to the first increase in the percentage of Americans with health insurance in twelve years.
When the large cost increases began again in 2001, the percentage of our citizens without insurance started going up again. Every time this happens, it increases the deficit, because government spending on health care goes up. For example, in 2009, in the depths of the recession, insurance companies raised their rates so sharply that their profits increased 56 percent, while most Americans were worried about going broke. As a result, five million people lost their health coverage, and more than three million of them became eligible for Medicaid.8 Ironically, the very for-profit insurance companies to which the antigovernment members of Congress want to give even more control over our health care are forcing more people into Medicaid, driving up the federal deficit the Tea Party deplores. Rising Medicaid costs also strain state governments’ budgets because the states must cover a portion of Medicaid’s costs under a formula that maxes out at 50 percent.
If Medicare continues to increase at the projected rate of inflation for the next ten years, costs in excess of the Medicare payroll tax will add $625 billion to the debt. Medicare spending as a percentage of GDP is expected to rise from 3.8 percent in 2011 to between 4.1 and 4.3 percent by 2021. The costs of Medicaid and other federally funded health programs are also projected to rise faster than inflation and increase their percentage of GDP. However, if the government’s health cost increases could be kept to the overall rate of inflation, the health programs’ cost would be hundreds of billions of dollars less than estimated, reducing the amount of benefit cuts or tax increases necessary to balance the budget.
How could we do that?
Medicare, like Social Security, is financed by a payroll tax, 1.45 percent. While most experts think a pension system like Social Security should be financially sound for seventy-five years, the general view is that Medicare would be sound if the fund’s projected solvency is eighteen years.
When I took office in 1993, the Medicare fund was scheduled to run out of money in 1999. When I left office in January 2001, its solvency had been extended to 2025, mostly through doing a host of little things to reduce health-care inflation under the direction of Secretary of Health and Human Services Donna Shalala.
The last two serious efforts to rein in Medicare costs produced greater savings than budget authorities estimated. Both the reform legislation signed by President Reagan and the savings package I signed in 1997 produced double the projected savings. Both bills received strong bipartisan support, and afterward there was virtually no public outcry that Medicare had been “cut.”
What, if any, relevance do these previous efforts have to the current Medicare debate? After another decade of health costs going up at three times the rate of inflation, plus the cost of the senior drug benefit, with the retirement of the baby boom
ers looming, the size of the problem is bigger. Also, the easiest savings option—cutting the reimbursement rates to Medicare Advantage providers—has already been taken, with the money going to close the doughnut hole in the senior drug program and to add a few years to the viability of the Medicare fund.
Nevertheless, because we have learned so much in the last few years about how to both reduce health-care costs and improve care, there are still lots of opportunities to save money in Medicare without cutting benefits and burdening seniors who aren’t wealthy. It won’t be easy, in part because changing the way health care is delivered and financed is hard to “score” in terms of budget savings. But this is by far the best way to reduce the projected cost increases, because changing the delivery and finance system will bring down the overall cost of health care, not just the cost of government-funded programs. That would help all Americans, making businesses more competitive and freeing up money for them to invest in pay raises and new growth.
Easy scoring is the surface appeal of the plan passed by the House Republicans. It would simply give Medicare beneficiaries a voucher and let them “shop” for a private plan that best meets their needs. The government can calculate exactly how much that would cost and how much it would save compared with the projected future costs of the present system. Those who oppose the plan, including me, think it’s a massive shift of costs onto seniors, because the voucher will require them to spend $6,000 or more out of pocket to keep the coverage they now receive, and it will do nothing to slow the rise in overall health-care costs. The bill’s supporters say the adverse effect is overstated for two reasons: first, they believe Medicare beneficiaries will have so much collective bargaining power they’ll be offered policies at prices that reduce out-of-pocket costs far below $6,000 a year; and, second, they think people on Medicare “overutilize” the system, often going to the doctor when they don’t really need to, so cutting back coverage a few thousand dollars a year won’t do them any harm and will save the system a lot of money.9
